Environmental, Social, Governance: ESGs Explained - Childfree Wealth Podcast Ep. 40

Bri

Today we're going to be talking about ESGs with Dr. Jay here. Dr. Jay, can you tell us what ESG stands for and give us a brief overview of them?

Dr. Jay

Well, it depends on who you're asking because you know, some people like ESG, some people don't. And it's really a question of how do you have your investing match your values? ESG itself is environmental, social and governance. And it can be a heck of a lot of stuff. All right. Whatever one person considers an environmental issue, somebody else doesn't what other people decide is a governance issue… it can go crazy. And if you get too far down this path, if you want your investing to match your values, eventually you run out of things you can invest in. So Bri, what are the values that matter to you?

Bri

I am big on community, education, social participation, and sustainability. Those are my four core values.

Dr. Jay

So let me play with this. Do you want to invest in oil?

Bri

Not particularly.

Dr. Jay

Why?

Bri

Because I think there are better ways to go about energy. I know we can't completely get rid of oil, but I do think we need to pursue other means of clean energy sources.

Dr. Jay

Okay Bri, I'm gonna get a little tough on you for a second. You've shared that your wife is a pilot. Most of the airlines I can't invest in & fossil fuels.

Bri

I know. I'm very aware. We have this conversation rather frequently about how her job essentially goes against all of that.

Dr. Jay

So you're willing to compromise on your values is what you said.

Bri

I suppose when it comes to that, yes, because she loves what she does and that's all she's ever wanted to be is an airline pilot.

Dr. Jay

And by the way, there's no right answer on this one. Like Morningstar actually has a system where you like have a scale, you know, oh, I don't want to, I'm just using oil as an example, but “I don't invest in oil. I don't want to invest in guns. I don't want to invest in tobacco. I don't want to invest in whatever.” And it's like, okay, cool. And then how much of your money are you willing to give up for that? That's a good question. We mentioned before, there's actually an ETF that just does, I want to drill stuff. Like literally that's what the ETF is called DRLL. Like seriously, I'm not saying you should have, shouldn't buy it. It just, it exists. Then there are others that say, Nope, I'm going to do no oil. The problem is if I cut out oil, I'm cutting out a whole lot of money and that's okay. But you're saying, well, I mean, there's somewhere in between. Yeah. Is that fair?

Bri

That is fair, because I... You know, like the whole sustainability movement and moving towards only electric vehicles, I don't think that we're at a point where that is possible within the next two years. And so... Some of that is a little too much of a push for me. I'm like... Let's look at this from a more practical standpoint. Can we really do that? I don't think we can. And I... That pisses people off when I say that, but... I'm... That's my... Feelings.

Dr. Jay

Yeah, and as we go further to ESG, there's the UN bad list. I call it the 17 goals, looks around poverty and energy and climate and all that. Some of them like, you know, no child labor. Okay, but now in the US, some states are now allowing child labor, especially in fast food restaurants. I don't know if you've seen that, but as a way to argue through the labor shortage, they're lowering the ages for kids working.

Bri

What are they calling the age limits?

Dr. Jay

You'd have to look state by state, but you would not like the answer. And by the way, let's be real on this, if your family has a farm, you've worked on it your entire life.

Bri

Yeah, you're out there when your dad tells you to go out.

Dr. Jay

If you’re big enough to hold the pitchfork you're out mucking stalls. I mean just... Yep. So there's this like judgment and I don't know like the UN bad list. I'm like alright cool let's not use slave labor. That sounds like a good answer but then this is where I my analogy with ESG is The Good Place. If you haven't watched the show, they have a ranking system for who goes to the good place and who goes to the bad place and spoiler alert in the end they find out really nobody's going to the good place because everything has a negative start somewhere. You buy your loved one a diamond now we get into the conflict diamonds and how is it mined and I mean where do we draw the limit? And I've had some people where I've gone through this exercise and asked what's important to them and the end result was okay you probably can't invest in the stock market because I don't believe in capitalism. I don't believe and then at that point then you're I don't know where you end up going because the hard part is financially you're gonna end up investing in the stock market. People go, “Well I'm gonna invest in bonds.” Bonds go to the companies in the stock market. So one of the ESG is weapons of war. I don't want to invest in companies that do weapons of war. Okay well do you have a US treasury bond because guess who's buying those?

Bri

Yeah, exactly.

Dr. Jay

And that's, I don't know. I personally, I do invest with the ESG style and I'll go through that in a bit, but I think the hard part is where do you draw the line? There are those who look at the way I invest to say it's wrong. So the way I invest, I always invest in three funds, the whole US, the whole world and some bonds. Vanguard has a set of ESG funds that I use personally. I'm not saying you should or shouldn't use those ESG funds. And those are what they call opt out ones. So they're like, listen, we're not going to invest in people that are doing the 17 UN things, coal and fossil fuels and weapons of war. It's like the naughty list. We're not going to invest in the naughty list, but it's not really proactive. So there are others who go, Oh, I only want to invest in companies that are doing the right things. So a great example of this is if you're looking for companies that have good representation of women on their boards, it's limited. I mean, it's hard. And that should be an issue we're pushing. It should be somewhere doing and people should be voting with their proxy to do that. That all happens in an active fund. Then you have to pay fees. And the question becomes, are those the ones I want to invest in versus somebody else? So what do you think? Do you want to be active or you want to just like opt out of the naughty list? And by the naughty list is not a technical term, but like you get the point.

Bri

Yeah, I would say primarily just I would rather just opt out, but I would be okay with having some active stuff. For the most part I don't want to have to think about any of my investing. That's just my preferred style. Put money in there and not think about it. Primarily passive.

Dr. Jay

Yeah, and the problem is, if I go too far down the, I'm just gonna pick the ones doing good things, I'm not gonna have a diversified portfolio.

Bri

And I don't think you can say that, well you can't say, that one thing is good because what everybody defines as good is going to be different based on your upbringings. Like you grew up in Connecticut, I grew up in South Dakota. I'm sure people can assume how our upbringings were and how we were raised is very different based on that. And our opinions of things change. Doesn't mean it's right or wrong, it just is. And there's no cut and dry line, it's more like a squiggle. So it's hard to say, yes this is always going to be good because everybody changes.

Dr. Jay

And let's even make it more fun with a couple, you know. And you're a great example. Your wife is burning fossil fuels and you're trying not to put money into them.

Bri

Yeah, I know. I... She burns the hell out of them. I will bleep that.

Dr. Jay

No, you can leave it. Here's the thing. I burn fossil fuels in my boat. I'll tell you that right now. But you know what? If you look at my carbon footprint by not having a kid, it's a whole lot less than what I burn in my boat.

Bri

That is very true.

Dr. Jay

I'm just playing it out. Yeah. I mean, nobody's perfect on any of this stuff. And one of the interesting ones is like, the carbon thing and the fossil fuels on it is one that's pretty well detailed out there. You end up throwing away some gains in order to it. And I actually think, personally, for me, my investing, I think ESG in the long run will be better because we're saving the world. But I can be wrong. Like seriously, because there's stuff that I'm not investing in. But like the carbon, we get into this carbon, I'm net neutral. What that really means is they're buying carbon offsets. So for example, I'm here at my house. I have 33 acres. I have a big old forest there behind here. I listed that last year as a carbon offset. I got paid $600 to not cut my trees. But some business somewhere got to count that as a carbon offset. Here's the truth. I wasn't cutting my trees either way. I just wasn't. But I might as well get my $600. And you get the good boy plaque of you're doing carbon offset. But did we really change the environment? I don't know. Like that's the hard part of this. And behind the scenes, just kind of give you guys a little look. Bri and I talk about the podcast and she said she had an article that was perfect for this. So Bri, tell me about this article you read.

Bri

Alright, so it has to do with the airlines, but there is currently an American Airlines pilot who is suing American Airlines saying the pension that invests in ESG's and that is too leftist and essentially he was saying that investing in ESG's is one of the greatest breaches of the fiduciary responsibility in American history

Dr. Jay

Okay, by the way, not going to get too political, but it is what it is. The last administration tried outlawing recommending ESG as a fiduciary. This one's kind of saying, yeah, you should. I look at it. So fiduciary definitions, fiduciary says, I'm putting your best interest out of my own. I'm looking out for you. It does not say it has to be for the best financial gain. That's the kind of like split of this. So if I say, “Hey, you invest in this and it has no oil, you have a potential, you can make more money if you had oil in it. What would you like to invest in?” I've done my fiduciary duty. I've explained the ups and downs. I personally, when I work with clients do not offer ESG unless they've said something that leans me in that direction. By the way, usually you can tell pretty quickly where somebody wants to go with their finances and I'll ask questions like, do you care what you invest in? And I have people, “Oh yes, I,” and I'm like, okay, that's fine. That's an ESG path because the people that are very adamant about it, I can guarantee will go that path. They're like, I don't care. I'll send them to the whole stock market. Now, would I like to send them down the ESG path? Maybe. But here's the thing. ESGs have a little higher fees, so that's an issue and a little less diversification. So, okay. I can understand them. From a pure financial standpoint, is ESG the right choice? We don't have enough data. Historically, the belief was ESGs were going to do worse than the whole stock market. The current data says, nah, not too far off. And now, by the way, depends on the day, you know, we're here in 2023 and then we have a different answer tomorrow. But you know, people have had years where oil has gone through the roof and that's why they've done better because they had oil. I'm just picking on oil. It doesn't matter. It can be any of the other stuff. So this American airlines pilot is saying, Hey, by offering this, you're pushing an agenda. What do you think Bri?

Bri

Well, I was having this conversation with my pilot wife group actually, and my response was, okay, make it so we can't talk about ESGs, but then we should also make it, we can't talk about things like DRLL if that's something you're interested in. Go right ahead, because there's always two sides to the coin.

Dr. Jay

And by the way, I'm going to argue, by the way, it's not exact, but go with me for a second. That if you decide to invest in something that does all oil, you are investing based on ESG. You're just investing on the inverse.

Bri

Exactly. Like, if you're gonna outlaw one, outlaw the other. That's my opinion. So you're really hurting yourself.

Dr. Jay

I don't know. And by the way, a lot of 401k plans do not currently have ESG options. And a lot of them are waiting to find out to see kind of where does this end up because of this issue. I don't know. I mean, it's going to go to court. And the question really is going to become is a fiduciary's duty just to get the most money? Now we are here in a childfree group. My argument is what's more important is your life than your money. And let's say you're embracing Die with Zero and you want to run your net worth down over life. I guess then by that theory, I could not advise you on anything that says, hey, you know, this is how you spend your money. It's always got to be about how to grow your money. That's not what the fiduciary duty is. Fiduciary duty is about putting the client first. If my client says it's a priority, then I need to do that. Now, on the flip side, I can see the argument about I as the as the CFP® should not be pushing my agenda on others. I'm OK with that. I'm going to tell you right now, though, you pick a childfree financial planning firm. There's going to be a certain amount of bias in it. It's not discrimination. It's just I'm going to say things from a childfree lens. You don't like that. That's OK.

Bri

Yeah, like people do appreciate the childfree lens because there are not conversations about having kids in our meetings. And we're not gonna be like oh you should have kids or you should do this or that no. That's not where it comes from and I agree the fiduciary responsibility you know I agree with the definition of it obviously because that's what I'm striving to do and I think that there needs to I think some people are just too wound up and need to take a Xanax or something and just chill out.

Dr. Jay

And right now, you know, we are recording this in June. I don't know when it's going to air, but right now we're recording it during pride month. And there's all this stuff about stocks and LGBT and people showing pride is going to impact stocks. I'm like, holy cow, what did we do wrong here that we can't like just say people can be people and it's okay to be okay with people. Like I'm just trying to keep it simple here. We at Childfree Wealth are very proud of embracing everybody in diversity and making it part of our culture. So if they want to ban us, go right ahead. I don't care. Actually, it gives us good publicity. Please do.

I’ve got a second book coming out at the end of 2024. The best thing that can happen for us is to get on the banned book list.

This is the argument around ESGs and saying, all right, should our money go to where we believe in? And the answer is yes. And if that means you don't want to buy a certain beer because you don't believe in what they did for advertising, I don't care. Go ahead. That's your money. I don't agree with it, but that's you. Be you. Let's ignore the fact that they are buying that beer to destroy the beer and the beer company already just sold the beer, so they don't care. 

Bri

Yeah, sales either way.

Dr. Jay

It used to be the old school, this was like, they would burn jerseys of the teams they don't like, and the people there are like go right ahead. Cause I already sold the jersey. I don't care what you do with it. I don't know. I mean, the question is how important are your values now? And I'm not saying like you have to have an exact line in the sand because there is no way you're going to have a good diversified portfolio that a hundred percent follows your values. I agreed. It's not, but I sleep a little better. Not completely better. A little better knowing, “Hey, these are the things I don't want to invest in.” Now I've also had people like on the list of the ESG, like there's no gambling, no sex work, no guns. No. And people are like, Oh, but I believe in one of those. I'm like, that's okay. I can't… you can go buy just that stock if you want. But like this ESG pool puts it all in there. I think gambling was one. Somebody was like, but I like gambling. Well then go gamble, but that's not part of the ESG pool. So you just have to kind of find that balance. I think the hard part is your 401k. You're not going to be able to, and that's where most of your money is.

Bri

Yeah, there are not many options. I just reviewed my wife's the other day and I think there were seven options total there. And most of them were target date funds. Five of them were target date funds.

Dr. Jay

Yeah. Then people go, well, should I just not invest in my 401(k)? No. Like you need to do what you got to do. And I don't know. I guess the point is like, if you're like, hey, I don't agree with what companies are doing. I don't agree with consumerism. I don't agree with landlords. I don't agree with.

But the system we live in right now is a capitalist society. If you want to make money, you have to invest. I don't know, Bri, what do you do if you're like, just hardcore socialist or whatever it may be, you don't believe in capitalist society? Do you still invest in the stock market?

Bri

I think it's okay to not agree with the system that you are in, but also participate in it realizing that as of today, that's the only way you're really going to get ahead or one of the easier ways to get ahead. Because at the end of the day, people listen to people who have money.

If you can accumulate wealth and use it for good, that's a really good way to make change.

Dr. Jay

And I've seen some people do that where they'll invest in whatever, but then they use the proceeds to match their goals, you know, invest in whatever or, you know, give them invested where, and I'm like, that makes good sense. The hard part there is really you made your money off of things you don't believe in to help the things you do, but that's kind of where we're at.

Yeah, and it's messed up. Like it's not great.

Yeah, I think the one other one on that caution, I have some people like, hey, I wanna invest based on my values and I wanna do XYZ alternative investment, private loans to people or… and a few other services like that or other type of programs invest in communities. That's fine, but you need to know the difference between what you're doing for giving purposes and what you're doing for investing purposes.

If you wanna take 10% of your money, so I take 10% of my money and I call my gambling money, I invest in whatever I want, individual stocks. Everything else is in the ESGs, or target day funds depending on 401(k)s or whatever's available. So my 10% goes to stocks I think might work or whatever. And by the way, not part of my investing plan, that's my gambling plan. If you wanna take 10% and go towards your values 100%, you know, you're investing in alternative things that you think will go wherever you wanna go, cool. That's not part of your investing plan now, that's part of your giving plan or your community plan or I don't know what you wanna call it. You can call it whatever you want, as long as it's not part of your investments.

Now, would you make money on that? Maybe, you know, so like people go, oh, I wanna invest in crypto. Crypto's got a huge carbon problem in the core models. Some of the other models now are going so that it's not as big of a deal, but the original crypto had some issues with it. Well, I don't know, like I feel wishy-washy on this podcast cause it depends on what matters. I think this is one of those areas. So I try to separate the stuff you can do yourself and the stuff you can need help. This is one of those where working with a professional can help you to kind of just walk through, what are you giving up? What are you doing? Where are you going? What matters, what doesn't? What I tend to find is people start with, I hate the world the way it's set up. I hate the structures, I hate the corporations. And then I go, okay, how do we find a niche within that that you can feel comfortable with on your investments? If you can't, the only other option, like you put it in your savings account, but I'm not gonna argue that your bank is better than whatever corporation you're in. I mean, you're still profiting somewhere, somebody else profiting on it. The other option, I guess, put the money in your mattress, but with inflation, that's getting rid of it. And plus your mattress is made of material that I'm sure is not sustainable.

So like. Very true. Like this is the problem. It's a matter of walking it through. I think the more interesting one is couples and kind of trying to find the set of values. What happens if one member of the couple wants to invest in everything and one wants to do it value-based? Now they're kind of investing towards two separate goals. Is that okay? Does it matter? And I've seen some couples where it's a big issue. I've seen others like, man, they do their money, who cares?

But it's especially, I swear, like we should have like a political, finance, and like overall life goals test for couples when they're, before they get engaged. Oh yeah. You put like a scale on where you are on all these issues and like pick which one of these matter most. So you know all of them in advance.

The other one I saw was interesting was what happens if your spouse changes, what's called political parties or political directions in the middle of a marriage? It's been an interesting debate right now. The other one I've seen is, can you date somebody from the opposite political party? I don't know. Can you date somebody with opposite values? I don't know. Like we'll have to come back and do an episode on compatible baggage, but all of this is part of your values and you need to make sure you're investing is good enough on your values. And I don't mean to like make light of it, but just so you can live with it. So Bri, bottom line I'm hearing from you is you're okay that your wife's flying, but we're not gonna invest in fossil fuels.

Bri

Essentially, yep.

Dr. Jay

Hey, it's an offset.