Haleh Moddasser.
For decades, socially responsible investing was brushed off as a strategy used by so-called left-wing tree huggers who were financially naïve and sacrificed returns for their altruistic beliefs.
But its updated version — environmental, social and governance investing (ESG) — which emerged in 2005, has not only gained more respect; it is generating broad excitement.
The strategy "isn't a granola proposition anymore." It can reduce portfolio risk and reap "comparable, if not better returns over the long term," argues Haleh Moddasser, a managing partner at Stearns Financial Group, in an interview with ThinkAdvisor.
The senior advisor maintains that ESG investing, also called sustainable investing, is clearly appropriate for women, who often have strong feelings about making the world a better place. However, most women ages 55 to 75 don't even know about ESG, according to a survey of boomer women Moddasser conducted in 2019.
To raise awareness, she has written a book examining the strategy: "Women on Top: Women, Wealth & Social Change" (Amazon.com-2020).
ESG investing, which is focused on corporations' environmental, social and governance ratings, has boomed in the last year and a half.
Indeed, the coronavirus pandemic and protests against racism gave impetus to ESG's rise as it skewed investors' focus from the environmental — mainly climate change — to ESG's social aspects.
During the second quarter of this year, ESG fund flows continued at a record pace, according to Morningstar. In the United States, they totaled $10.4 billion, which nearly equaled Q1 flows. For the first half, they amounted to $20.9 billion; the annual record of $21.4 billion net flows set in 2019 was four times the previous record for a year.
Raymond James Financial, which in 2018 established a Sustainable Investing Advisory Council, continues to see "growing interest in sustainable investing, particularly among … higher-net-worth clients, women and millennials," Kim Jenson, private client group chief operating officer, said in a statement.
Moreover, as Research Affiliates' partners John West and Ari Polychronopoulos write in a July 2020 paper, "ESG could be a powerful theme as new owners of capital — in particular, women and millennials — prioritize ESG in their portfolios over the next two decades."
In the interview, Moddasser, a CPA previously with PricewaterhouseCoopers, discusses both ESG stocks and the pros and cons of ESG bonds, plus the potential bad impact on millennials of the controversial ESG provision in the Labor Department's proposed new guide for 401(k) plan fiduciaries should the rule be finalized.
ThinkAdvisor recently interviewed Moddasser, on the phone from North Carolina. The managing partner of Stearns' Chapel Hill office unpacks what she calls ESG's "modern iteration," which debunks the criticism that investors who have a preference for environmental, social and governance funds means they're thinking "more with their hearts than their brains."
Here are highlights:
THINKADVISOR: How has ESG investing, formerly called socially responsible investing, changed?
HALEH MODDASSER: This isn't a granola proposition anymore. The modern iteration of socially responsible investing is different: It doesn't exclude entire asset classes, and there are so many options available that the price points have really come down to make it competitive. When you invest with an ESG lens, you're potentially reducing risk while getting comparable, if not better, returns over the long term.
Please explain how ESG reduces risk.
Even BlackRock has acknowledged that adding an ESG factor to normal fundamental analysis of any security reduces portfolio risk. For example, if you had an ESG factor in the analysis of Volkswagen stock, you would have sold it before their [2015] emissions scandal.
In your 2019 survey of about 500 boomer women concerning ESG, you found they were primarily interested in gun control, gender equality and climate change. Does that align with ESG preferences now?
For the first time ever, the "S" — for Social — in ESG has become dominant [for both male and female investors], as opposed to "E," the environmental, particularly climate change. I think this is because of the pandemic and the systemic racism that's been exposed. ESG has become more about the corporate role toward stakeholders, not just shareholders.
Why have so many financial advisors been lukewarm about ESG investing?
ESG is viewed as being soft, touch-feely. Before 2005, the thinking was that investors in socially responsible investing, as it was called, were investing more with their hearts than their brains, that they were tree-hugging, bleeding-heart liberals who had no sense of money and finance and that they were sacrificing returns — that ESG wasn't good investing.
Was this true?
It wasn't completely off-base. Many times people did take a haircut on returns; expense ratios were high because there weren't many funds. And the investments were exclusionary [negative screening; e.g, tobacco companies].
