When Maeve, Phoebe, and Sophie were younger I would take one of them every Saturday and we would have daddy/daughter day. It was fun, we would do all “girl” stuff which always circled around lunch at Mary Ellen’s bakery for a chocolate chip muffin. So, last week I was having one of those parental moments where I was missing my girls. Sophie got the call, and I was on my way to see her at Bryant. At lunch we got to talking about an assignment from her sociology classes about money and human values as it relates to happiness. She found the course fascinating.
On my ride home . . . I got thinking. I got thinking about money and human values and how much does it cost to feel good? What does it take for us to be truly happy in life? Of course, “happiness” is subjective but many studies have been done to help answer the question of money and how it relates to our happiness. For example, a recent study from Purdue University attempted to answer this question by measuring emotional well-being and life satisfaction. One of their findings was that globally, the ideal income point for an individual is $95,000 for life satisfaction and between $60,000 to $75,000 for emotional well-being. In North America, the individual income level for life satisfaction was found to be $105,000 per year₁.
I decided to dig into this topic a little deeper as it relates to the specific investments that we make, especially in today’s environmental and political climate, and I’d like to spend our time this week on the topic of ESG investing.
Now, it’s widely reported in the media that many companies are increasingly setting ambitious sustainability or other ESG targets. ESG stands for Environmental, Social and Governance and refers to the three key factors when measuring the sustainability and ethical impact of an investment in a business or company. A growing number of individual investors are also starting to evaluate companies using ESG criteria to screen their own investments as a way to support their personal social agenda.
At face value, this sounds like a reasonable vetting process for your hard-earned money. Why wouldn’t someone consider investing in companies that have pledged to support industries that focus on making the world a better place? But unfortunately it’s not that easy.
One key consideration is cost. There are significant financial costs involved in realizing these new sustainability ambitions. In fact, Morningstar has said that investors in sustainable funds are paying a “greenium” relative to investors in conventional funds. In a recent study by them, they found a higher asset-weighted average expense ratio for environmental, social and governance (ESG) funds (0.61%) compared with their traditional peers (0.41%)₂.
Consider the fact that sustainable-investing assets reached $35.3 trillion globally at the start of 2020 (a 15% increase over 2018 to represent almost 36% of total assets under management), and this adds up to an amazing “greenium” amount₃.
In my experience, most investors who purchase ESG-oriented investments don’t realize how much they are paying. At the average ESG fund, the fees can be up to three times what’s reported, according to a new study. That’s because these funds—also often called green, sustainable or responsible—are nowhere near as pure as they purport to be. The average green U.S. stock ETF charges 0.17% in annual fees, according to Morningstar—0.05 percentage points more than conventional funds₄.
In addition to the cost of owning these investments, we need to consider their performance too. Many ESG investments favor the software and healthcare industries, while tilting away from oil and gas. Last year, unfortunately, tech stocks performed poorly along with most of the market and “green funds” lost 19.7%, faring even worse than conventional funds, which fell 18.1%₅.
It’s also important to question the composition of any ESG investment you’re considering, too. For example, according to a new Harvard study, ESG funds have, on average, 68% of their assets invested in “the exact same” holdings as non-ESG funds₆. This means that only about a third of your money in the average ESG fund is distinctly “green,” yet you will incur the higher fees on the entire portfolio. So essentially you’re paying three times more in fees for a fund that that may be only about 30% green.
Folks, I’m not trying to dissuade anyone from their efforts to make the world a better place or from investing in ways that contribute to your life satisfaction. But make sure you enter into each investment with your eyes open and all of the facts in front of you. Only then can you truly evaluate if your investing style will add to both your retirement income and your long-term happiness.
And as always – be vigilant and stay alert, because you deserve more!
Have a great week.
Jeff Cutter, CPA/PFS is President of Cutter Financial Group, LLC, an SEC Registered Investment Advisor with offices in Falmouth, Duxbury, and Mansfield, MA. Insurance offered through its affiliate, CutterInsure, Inc.