Why “Socially Responsible” Investing is Too Good to Be True
So you’ve heard of socially responsible investing, but do you really know what it means or how companies earn the label of “responsible”?
In this episode, Allegra and Whitney dive into why these types of funds are so appealing and why they’re really too good to be true.
They discuss:
What ESG funds are and why more women than men are interested in investing in them
How companies use socially responsible investing in their marketing and PR
What people inside the industry are really saying about ESG funds (hint: it’s not pretty)
What it actually means to be a socially responsible investor and have a real impact on the causes you care about most
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Hi. This is Allegra Moet Brantley and you're listening to the coffee and coin podcast where women talk wealth. I'm the founder and CEO of Factora, a company on a mission to lead 1 million women to 1 million in net worth. Because when women have more money, we'll have more power to be the change we want to see in the world. If you're ready to hear real women share their real numbers and investment journeys and have a sneaky feeling you should be doing a little more with your money, you are in the right place. Just sit back, relax and turn me up.
All opinions expressed by Team Factora and podcast guests are solely their own and do not necessarily reflect the opinions of Factora Incorporated. This podcast is for informational purposes only and should not be used as the basis for investment decisions. Team Factora. And podcast guests may maintain positions in the securities or investments discussed in this podcast.
Welcome back to another episode of Coffee and coin. I've got a Whitney on the pod today. Welcome back, Whitney.
Oh, thank you. It's so good to be here.
We were just talking before we pressed record about what was the last time we did a podcast together. And I believe it was over a year ago, when you were setting out to become the new age Carmen Sandiego, which I like to call Whitney San Diego, where you've been on a year long sabbatical that you love so much. You decided to continue on with.
Yeah, it's been awesome. Every time. For the listeners every time I like her and I get on a call. She's like, Where in the world is Whitney San Diego. I'm sure we're dating ourselves with that joke. But
hopefully people play that computer game because it was my first and my favorite to this day. Oh, it was fun. So where in the world is what do you say Diego as we record this episode,
I'm currently in California just got back from a five week trip in Southeast Asia hit the beautiful beaches of Thailand Bali and, and went through Singapore for a weekend.
Amazing. Well, not as fabulous. But I did just get back from a weekend wedding hurrah in Puerto Rica. So I'm back and I've got only burns to show for being in the sun. That sweet, pale skinny ears. I know that ginger, blood Poor, poor baby daughter, because she's not even a redhead. And she also has the no pigment. We had her in a sun hat the entire time. So okay, we wanted to do a podcast today, because the wealth circle is going strong, we are actually getting to the best part. I mean, arguably, I like it all. But my favorite part. Yeah, your favorite part for sure. Because you are definitely our like, main stock market investing guru at Factora having done it for so long and loving it so much. And it being the primary way you've built your wealth so that you're able to take annual sabbaticals and extend them for another year, which is really incredible, very aspirational. And definitely attainable. Because you did it in 12 years, right? You went from starting a career to deciding to pause and take a sabbatical because you've had the financial foundation, but also such a big stock market portfolio that you could do so. So one of the things that happens when we get to the stock market portion of the wealth circle is that women who love being socially responsible and impactful in all areas of their life, also want to do that with investing. And we immediately get the question of what about investing in ESG s. So if you are a listener and doesn't know what an ESG is, well, we're going to define that for you today. But we really want to break down more than just what they are. We want to go a little deeper and talk through our own opinions on ESG investing and how we think women can be really savvy investors that still fits with their value set. So without too much further ado, let's just jump right into it wet. Can you describe for us what the heck an ESG fund is?
Yeah, let's break it down. So ESG funds provide a way to invest sustainably, and ESG stands for environmental, social and governance. So ESG funds screen investments using those three factors to decide whether to include them in their portfolios.
Okay, so can you give me some examples of what ESG funds are?
Yeah, I think that'll help. So environmental is anything about conserving nature, we're talking, you know, reducing carbon emissions, waste management, water usage, pollution, anything around planet Earth. Social is how a company treats its employees and its customers. So it's very people related anything around human rights, gender equality, security, privacy, things like that. And then governance is how a company is run generally, the diversity of its board, where its political donations are going, any internal corruption happening, and everything like that.
Okay, so that's really helpful to break down the environmental, social and governance piece of what makes up ESG funds. So why do you think people, especially the women that we see come into fact Torah, why are they so interested in ESG? Investing? Well, I
think, you know, upholding personal values is very important. And people want to have a sense that their investment dollars are bringing about positive change. So taking an ESG investment approach, it's, it's really going to make people feel that they're putting their money where their mouth is, you know, instead of just talking about food waste, I can now invest in companies that are actually doing something about it. And we know that women more so than men are philanthropic creatures. So when we get to the part in the wealth circle about selecting, you know, investment funds to put in your portfolio. Without surprise, the first question we get is, well, how can I invest in ESG funds?
Totally. I mean, this really is we get it every time we win the well circle, the first thing that comes up when we started talking about putting a portfolio together. So basically, the do good factor of ESG funds is really clear, and sounds awesome. But what are some other reasons that ESG is have gained so much popularity so quickly? Because I feel like es G's are pretty new. Like this wasn't you couldn't invest in this type of investment fund. A few decades ago?
Yeah. Well, we've seen, you know, we've seen a lot of fallout of companies. And it's still happening, look at the FTX scandal recently. So I mean, ESG criteria, they aim to avoid investing in companies that are engaged in risky or questionable practices. So that in and of itself is attractive. But, you know, in addition, it's taking those kinds of screening measures up front, helps investors avoid those blow ups on the back end from any unethical behavior. Because, I mean, any type of scandal is going to completely rock a company's stock price. So in theory, ESG funds would steer clear of companies like Enron, Lehman Brothers FTX, if it were a publicly traded company,
but even then, you know, there are so many stocks in the stock market, meaning there are so many companies that you can invest in and have ownership of, I just don't know how you could necessarily know who is going to have the bad practices that are not only going to drop their stock price, but you know, Enron and Lehman Brothers, they don't even exist anymore. Yeah. So I guess I'm just saying, it sounds so nice in theory, but it feels really hard to be able to do that. Because obviously the people who are or excuse me, the companies run by people who are participating in questionable practices, you don't know about it often until it's too late.
Well, I think that I mean it as a retail individual investors, it it takes a long time to research companies and if you're investing in specific funds to really like lift up the hood and and see what's in there. And I think that's why investors really Lie on these ESG funds, they want a professional portfolio manager manager to do the research and do the digging for them. And then simply trust that that portfolio manager has done a good job and has filtered out these questionable companies and are only investing in truly ethical companies.
Yes, and I just want to define for any listeners who might not know the term retail investors, Whitney and I are both retail investors, retailers, and we are individuals who go and open up brokerage accounts at financial institutions, and select what securities we want. Whereas professional investors would be doing that for other people, we are doing it for ourselves. And one of the things we talked about in the wall circle that Whitney and I both love is that we live in a time where it is so accessible as a retail investor to be able to go out and pick the type of funds you want. So funds that have this ESG label sound really good. But I guess my question is, how do you earn the ESG label, like, who is holding these funds accountable to maintaining these ESG standards?
Bingo. That is unfortunately, where the ESG story takes a bit of a twist, because ESG sounds great on the surface. But it is extremely abstract. Because everybody holds a different view of ethics, right? Like my ethics standards are different from yours, which are different from this. And there is no official ESG authority. So there's no universal analysis of ESG risks or a framework to police ESG labeling, you will see when you research funds, there, there's usually an ESG score given to to a fund. But these are calculated by different companies using different methodologies in different data collection processes. So looking at a score is it's not really going to tell you much it's not apples to apples, and it's completely arbitrary.
Okay, so there's really no standardization of the ESG label, which is sounding a little not good. So I guess this is where listeners are going to start to hear our opinions of ESG is because it feels as though just listening to a label is being too trusting. It's like letting the industry which as we know, is predominantly run by men, men are still the largest contingent, and I'm talking in the 90s percentile of investments on managers, investment advisors, fund company owners, so it's kind of letting them decide what constitutes responsible and sustainable investing for us.
Yep, that's exactly right. Like it's, they're really asking us as investors to trust them. Like, just trust me, I'm putting all good things in, in my portfolio. And with the proliferation of green investing, right? Everyone wants to be a green investor, I admit, I want to be a green investor, the environment is very important to me. Social issues are very important to me. But unfortunately, E S G has become a bit of a self counting buzzword in the industry. And we're we're seeing a lot of issues right now with companies using ESG as a pure marketing tool or a pure PR campaign, and they're grossly over exaggerating their actual environmental impact and sustainable mobility efforts. So, you know, I've just been reading so much in the news about greenwashing, which reminds me that we can't simply just trust these labels.
Just in case people don't really understand what you mean when you say greenwashing because I know we've seen this from a number of reputable brands, the ones we all use, like Starbucks, h&m and Coca Cola. What do you mean when you say greenwashing?
So greenwashing is really, it? It's more of a story spin on how a company or a fund is, you know, truly ESG truly sustainable, but when you do again to it, it's a story. So I mean, here's a good example, because I know there are a lot of Starbucks lovers out there. Recently, Starbucks came out with the strawless lid to cut down on plastic waste, because they used to get a, a lid and a straw. And they wanted to cut down on that. So they came out with the strawless lid. And, you know, I forget who did the research maybe, or thought or, or, or a company like that sound that the new strawless lid uses more plastic than the old lid and straw combo. So that's a definition of greenwashing where you really can't take this ESG publicity and the sustainability efforts for face value.
Yeah, this kind of goes to one of fact Toras main company principles, which is questioned the CuO like, don't just take things as they are dished out to you. A lot of times these companies, especially the big ones, they are looking for a way to get more brand love. And so they spin stories. And a lot of people don't research beyond what the subject of the story is. They don't go and dig a little deeper. And I feel like that's a perfect analogy to how I know we both feel about ESG investing like it sounds so good. In fact, it sounds too good to be true. When you dig a little deeper, it's often untrue. And we ought to remember
right like, Yeah, I'm wanting to believe that the new stylist like cut down on plastic, I want to believe that the recycling programs, fast fashion companies are putting into practice that are actually doing something about the 100 million tonnes of textile waste. They're putting in landfill. But the truth of the matter is, it's it's not doing it's not making a dent.
Yeah, it's like with everything right. I know, a lot of people think that it's more sustainable to use nut milks, for example, then whole milks where you have to have cattle and they need space to graze and carbon emissions, and you know, all these stories that we hear. But nuts don't make milk. So you're using a lot of water to get nut runoff that you can package with a bunch of other bad stuff. And the waterways from that is extraordinary. But everyone feels good. ordering the nut milk, and not the regular milk. Yeah, it's just it's so interesting. I feel like it's all marketing, and for always getting duped. And this is the thing I'm constantly saying to women. We are the top household consumers like women are choosing the products that go into their households, and really in on our skin and into our bodies. And so we really need to take the onus of doing a bigger deep dive because marketing is good. And its target is on our back to make to spin a story that we want to buy. The products that we think are sustainable, and invest in the funds that we think are good for Mother Earth that oftentimes aren't,
because AI marketing is just getting better, just getting smarter. So we really need to be careful here.
So I thought this was interesting and worth mentioning on this episode. But Tariq fancy who was formerly black rocks, Chief Sustainable Investment Officer, he actually blew the whistle on his own industry, saying, and this is a direct quote, that ESG is not as good for investing processes as people claim. The reality is it doesn't pay that much to be responsible. And none of it has any real social impact. He also said that ESGs are a dangerous placebo that harms the public interest. And I was just like, blown away to hear someone who's supposed to be an advocate for that industry. say such a thing. And it's,
I mean, it's such a shocking, right he he basically up and quit on the ESG industry and came out with that quote, you know, a couple of years ago, which I feel like it's not surprising. I mean, it's just finally coming to light what has been happening with ESG funds. And I mean, if you remember I think it was last year. or mid last year, Tesla got removed from the s&p ESG index for business misconduct reasons. But Exxon, you know, the leading perpetrator of global warming makes the cut. So when you have Exxon in an ESG index, I think that's when we should start questioning the standards,
right? Like when you have a gas company in an electric vehicle company rattle,
whose mission is to, you know, help the planet. And I mean, the other thing is like, you can only have so many ESG filters, right. So deforestation, which is also a leading perpetrator of climate change is not any issue filter. So it's like, we got to raise the red red flag here.
Yeah. Okay, what about I know, there's this thing called debt for nature swaps, where some wealthy fund managers go to developing countries that are about to default on their debt, offered to negotiate with their bondholders to give them, let's say, 50 cents on the dollar. And in return for those savings, the developing country has to promise to, you know, protect the rainforests or the call reefs or whatever piece of nature is at risk. And then the fund manager has been known to take that debt, repackage it with an ESG label, because of what the country has promised to do. And a promise doesn't mean they're doing it, and sells it to us as a package that we can, you know, buy as a fund in our brokerage accounts or our 401 Ks. If you
have thoughts on this. I mean, it's crazy, right? Like, we're essentially thinking we're buying ESG investments, and we're really buying underdeveloped countries debt.
We this reminds me of what happened with the mortgage crisis, though. Oh, yeah. Right. I was like, Oh, yes. Wow, great mortgages. And then we take the worst, after we're done. Playing with the best, we repackaged the worst as if it was quality, and it's really a mess. And then we all saw the fallout from that
companies have to get and fund managers have to get creative here, right? Like we live in a capitalistic society. This is a capitalistic industry, and they're in the business of making money. And they're in competition with one another. So when you know, one, you know, big fund manager is marketing ESG. Another needs to do it and when three and then as you're doing it, it becomes a benchmark and a baseline and eventually, it's just a check the box how many ESG funds you have, you have to offer this. And so they start getting creative and they start doing the debt free nature swaps, for example. But it's a again in it in it comes to trust, and it comes to the fact that we want to believe it. But this is this is where we need to be reminded to dig a little deeper and and start making our own opinions.
Totally. Well, okay, it sounds like we can definitely agree that being responsible and contributing to the well being of our planet is important. But we're basically discussing how dangerous it can be to just completely hand over our social responsibility to companies and to asset managers. So I guess that makes me curious. What do you do about ESG? Is do you have them in your personal portfolio?
So there are a number of initiatives that I'm extremely passionate about and really stand for elementary education for underserved communities is one financial education for all is another eliminating waste and giving back to Mother Earth. It is, you know, another but I have decided that the best way for me to make a difference in those areas is not to simply invest my money in ESG funds and say, Okay, that's it, I feel good. I've done my part, but rather to stick to my investment fundamentals, and focus on returns. Because when my portfolio is growing, and I'm making money and the money is put into my hands, I can then have fun more of a direct impact on my community, with the organizations that I truly believe in. And I do, you know, think live up to my social responsibility standards here here,
I feel like I'm a complete ditto to that comment. Because the whole, I mean, the whole reason Factora exists is to help women have more financial autonomy. And it is my belief that we can have a lot more impact when we go direct to causes we care about that is why I am so passionate about teaching women, all of these financial fundamentals and even uncovering kind of the background and going a little deeper on ESG funds. Because, yes, marketing it to us, it sounds great. But we need to go a little deeper and be a little bit more solid in our understanding of the different investments we can make and how much we can be investing in general. So that is why the wealth circle exists to teach women this stuff so that they don't continue to be duped by the financial industry. Because if you think about it, the financial industry is there as a capitalist set of companies that they, their goal is to make money. I mean, their goal is for their customers to make some money to so that they stick with them, and get their fees year after year. But I don't like that the financial industry tries to make everything so complex and confusing. What we do at Factora is tried to simplify and just talk through what are the foundational things we need to understand so that more women can feel comfortable investing and doing more of it on their terms. And so if socially responsible investing is important to you, sure, there are all these ESG funds. But really, what Whitney and I are saying is make as much money as you can get your wealth to the best place that you can in your lifetime, and then go direct to the charitable causes you care about starting the companies that you think should exist, because you can have so much more impact when you do. So I feel like I always fire women up in the wall circle about this. They're like ESG, and I'm like, think twice, you should make money for yourself and then turn around and spend it so that you know it's going to the places that you want it to go. And sometimes they get pushed back there. But that is truly what I believe because we just talked about a lot of these dishonest pieces that are coming to light in the ES G industry and I guess woody what are some like final things investors should know about ESG funds, because I really want to drive this point home about why we shouldn't just put our trust into fund managers who put together an investment fun for us and tell us you're gonna make returns and you're gonna get back to planet earth like, yeah, it's got to be true if
we as investors, if we all just took an ESG approach and, and said, okay, like, this is how we're going to change the world. It's not going to work, right? I mean, there was even a recent a quote by an NYU business professor that came out that said, I believe that ESG is at its core, a feel good scam, that is enriching consultants, measurement services and fund managers, while doing close to nothing for the businesses and investors it claims to help and even less for society. I mean, out so yeah, to your point about get the money in your hands invest to get the money in your hands and then make a direct impact in the organization. Do you believe in heck, start your own organizations that are, you know, for the causes you truly believe in? That's, that's truly I think, how we're going to see a difference in the world. But even besides the scams for those people who who are going to put in the time to research and and hopefully find those truly good ESG you know, investments out there, because I know there are a lot of people dedicating their lives to this initiatives, and they're not all bad, right? I want to be clear about that. They're not all bad. Unfortunately, they're in a sea of a lot of murky water and it's hard to find the good ones, but they are out there. But the thing to remember about ESG funds is that any ESG investing in general is that there's always going to be a conflict of ethics at play. You know, a company can fit ESG in one area but not another a company can be doing great Eat things for the environment, but have a number of sexual harassment cases against women. So does that fit your ESG? Standard or not? Some people are gonna say yes, some people are going to say no. Another thing is that when you are looking at ESG, specific investments, the menu is going to be a little bit more limited than broad index based investing. So that's going to slim your diversification down a little bit. And as we know, diversification, asset allocation, that's a core investment principle that cannot be overlooked. We talked about that a lot in the wealth circle. Another thing is that because of the additional screening for ESG, is these funds typically trade at a premium, making them a more invest expensive investment style. And when investors pay more for a fund, it's going to eat into their returns. So
yeah, so when they're paying more, they definitely need to be getting higher returns. And I feel like a lot of the word on the street is that you often make lower returns with these ESG funds. Yep.
Oh, gosh, the CEO of Vanguard, I have another quote for you, CEO of Vanguard recently pulled out of the Climate Initiative. And he was quoted saying, We cannot state that environmental, social and governance investing is better performance wise than broad index space investing. Our research indicates that ESG investing does not have any advantage over broad based investing. So we're not getting necessarily getting the performance needed with ESGs. And they're costing investors more money. Yeah.
Well, okay. I think to wrap things up, what recommendations do you have for people who do want to invest sustainably,
my number one recommendation would be to set your own ESG standards, it is unlikely that, you know, a typical Portfolio Manager older white male is going to have the same core values that you have. And I mean, environmental, social and governance is, it's far too important to just, you know, hand over to someone else, everyone needs to care about this, but we cannot outsource our own values. And I mean, that being said, know what your values are. So many women come to us at fact Torah and enter the wealth circle without knowing their values yet, and that's one of the first exercises we go through. Know your criteria, know what you stand for. And if you don't take a minute to do some journaling, get introspective and solidify what ESG means to you. And you know, it's not going to align perfectly, everything's not going to align perfectly with your beliefs in the investment world. But knowing your priorities, and kind of stacking those up against each other that sure is going to help. Another I guess, tip, I have a recommendation I have is Don't get so distracted by ESG investing, that you abandon your core investment principles, right investing is is still the purpose is still to get you that return to grow your money. And we cannot do that if we just completely abandon understanding, you know how to set up your account structure and your tax strategy. prioritizing your contributions between the accounts based on your personal goals, determining your asset allocation, based on risk tolerance, making sure your funds selections fit in that allocation, and then selecting funds that are low cost and have a solid track record. So at the end of the day, if you find an ESG fund that fits your criteria, that truly is amazing. But if not, my recommendation is to not force it don't force ESG into your portfolio. Instead use those invested in returns directly to support causes and initiatives that you care about most. Because the more money you have, the more of a positive influence. You're going to be able to have. And I guess number three RAC is just trust your own ESG research every brand, every company, every media source, they're going to spin up a story that fits their interests, not your own. So don't take good or bad for face value, dig deeper, look at the facts and question question the quote question the status quo is what we love to say, at Factora?
Yeah, I am. I think that's a really good point about there's gonna be a story spine about anything. And it's the same with people, right, like, people are good and bad companies are good and bad. So that is why I know that it makes more sense to pick and choose what works for you like, does it matter to you that the majority of companies that you have, in your portfolio, have really good gender parity and equity so that their board looks the way you would want the health of the company to be run? Or is that not as important as the environment because when you just try and get everything in, it's almost like you get nothing in. And I think that's how a lot of these, quote unquote, I guess I won't call them scams, but just you said it best, the murky water is happening around ESG funds, like they're packaging them in a way that's marketed really beautifully. And it sounds good, just give your autonomy over and do it that way. But if it's going to cost you more, and it's going to earn you less returns, the better way to do it is your own research and your own criteria. So I hope this episode was helpful in breaking down, what ESGs are, what you know, they do what has been happening in the industry. Now, because again, they are pretty new. And that it's really important to be a research and confident investor. And the way you do that is by learning what this stuff is, and then going out and doing it. And I also, I guess I want to end with this. Like, I'm not gonna sit here and say that I don't probably have terrible companies in my portfolio. I'm sure I do. Because like I just said, a lot are plenty good and plenty bad as in good. They might earn really great dividends bad, they might be doing horrible stuff to the ocean, you know. But at the end of the day, I know that the biggest way I can make an impact is by running this company and teaching women how to look under the hood. And so any listeners that don't feel confident picking investments, that's really why Factora exists so that you can learn how to do this and how to make your own parameters so that you don't have to depend on someone else all the time.
You got a community for you. That's right. Yeah.
All right. Well, Whitney San Diego, I will see you on our next episode. Thanks for
having me, Allegra and money friends. Trust your intelligence, trust your gut, and abide by your set of standards.
I love it. Thank you. If you enjoyed this episode, come join us in a well circle. It's our live online 12 week course and community where we teach you how to create a personalized financial plan alongside hundreds of other women building wealth. It will change your life and your money for good. You can apply at Factorawealth.com/wealth-circle
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