Our podcast episode today had Tim Nash, "The Sustainable Economist" as a guest to talk about socially responsible investing. Tim had some interesting arguments on how choosing sustainable investments can increase the cost of capital for the "bad companies" which may affect their behavior.

He also argued that changing your portfolio can have a much bigger environmental impact than changing your own behavior. For example, if you have a green portfolio but drive an SUV, you're still net positive. The concept is that because so much of the environmental impact comes from corporations vs. individuals, not owning bad corporations can dramatically reduce your individual carbon footprint.

However, this is challenging philosophically. For either action to have an impact (individual actions or avoiding bad companies) they have to be done at scale by a ton of people. One person not driving an SUV has no impact globally, but neither does one person not owning oil companies. These things need to happen at scale to effect change.

Tim also offered some feedback on Wealthsimple's socially responsible portfolios. In short, they consist of various "socially responsible" products, but by trying to appeal to every definition of socially responsible, they are likely to be unsavory for most definitions of social responsibility.

Tim shares a vast amount of knowledge and ideas with us on how investors wishing to put their money where their heart is can go about investing more ethically and sustainably. We hear about Tim's journey into investing and economics and how he wound up doing the work he currently does, helping investors clarify where their money is going and how to put it portfolios that are more aligned with their beliefs. He unpacks how these ideas and actions can have an impact and what it would take for some kind of systemic shift towards more sustainable industry and companies. We discuss the use of other modes of change as well as the personal practice of investors versus the placement of their money. Tim does such a great job of explaining how he goes about assessing different companies and portfolios and filtering which meet the criteria that he would suggest to his audience. The last part of the episode contains a really impressive argument from Tim around how investing this way can also be beneficial for strictly economic reasons and that it would suit all people to consider the factors he is espousing. For an inspirational chat with a truly great guest, listen in today!

Key Points From This Episode:

•    Tim's education and how he became The Sustainable Economist. [0:01:49.6]

•    The actual service that Time provides for his clients and audience. [0:04:18.1]

•    How does this type of sustainable investing have an impact? [0:05:41.9]

•    Considering the efficacy of other means to bring about change. [0:11:06.4]

•    Squaring personal practices and investing principles of an individual. [0:14:37.3]

•    The criteria that Tim uses to assess items in a portfolio. [0:21:17.1]

•    Tim unpacks his experiences of anarchist portfolios! [0:28:54.8]

•    Allowing ethical investors to feel good about their portfolios. [0:31:50.6]

•    The usefulness of so-called ESG screening for finding robust companies. [0:33:41.3]

•    The twofold imperative to ethical and sustainable investing. [0:38:11.2]

•    The product landscape for investors building sustainable portfolios. [0:40:57.8]

•    How Tim helps people through his fee for service planning. [0:45:48.2]

•    Tim's own definition of success! [0:47:44.6]

Read the Transcript:

Tell us, how did you become The Sustainable Economist? 

Sure, my background is in economics and philosophy. I did my BA in economics at Dalhousie in Halifax and then just sort of took all the philosophy electives that I could. Had a lot of issues with the economic system that I was learning so I actually went to Sweden and did my masters in sustainability. Came back, I’d done my thesis focused on this idea of responsible investment, looking at financial materiality of the sustainability issues.  

Came back to Toronto in July of 2008, ready to take the investment world by storm and three months later, the market crashed. There were no jobs available, you know, this whole idea of sustainability totally got thrown on the back burner. I really struggled for the first three years trying to figure it out and then I got a little early inheritance from my grandpa which wasn’t a huge amount but it was enough to pay of my student loans and I wanted to invest like seven or 8k inside a TFSA and looked at the different options available.

Fell in love with the CouchPotato approach. Using these passive index ETF’s. When I looked at the companies inside of it. I kind of get it. Like there were just companies in there, I couldn’t stand. That’s when I started researching socially responsible and green ETF’s. I created my blog like myself, like I played around with Photoshop, turned myself into Superman and just kind of like threw up my model portfolios. 

You know, based on the journey that I was going through and then from there, people started reaching out, saying, "Tim, this is great, I love it but how the heck do I actually do this?" From there, I sort of shifted my focus, you know, at that time, I was teaching economics at Sheridan College and I was just sort of like you know, making ends meet however I could. 

Then it sort of grown into a financial planning practice. Where now, I’ve launched my new brand which is Good Investing and really, I’m a few for service financial planner, teaching people how to actually do this.

 

Are you still teaching economics?

I’m not. I could probably 2017. A couple of years ago and kind of went full on into financial planning and haven’t looked back, things are going really well and I’m kind of trying to figure out now, there’s been a surge of demand over the last few months and so starting to think about expanding and maybe hiring another financial planner.

 

That’s super cool. You’re doing financial planning and portfolio suggestions to people, you’re not doing the actual implementation correct?

That’s right, I’m not a broker or a manager, I’m not registered with the Ontario Securities Commission. The way it works is I provide research and coaching. I’ll never tell people exactly what to buy. I’m always going to show them a range of options and really help them understand those options and the tradeoffs there.

I am allowed to help with things like asset mix and tax optimization and then really where a lot of people get value is basically like holding their hand as they buy an ETF for the first time, you know? Getting them to share their screen with me over Skype or sitting next to them and helping them understand like a limit order versus a market order and it’s really scary the first time people do that.

It’s a combination of sort of this kind of like research coaching, financial planning and then really just that sort of hand holding and often times, the accountability piece to make sure that people actually do implement their plan.

 

Interesting, we could have a whole other discussion on like full service wealth management versus fee for service. But that’s not the direction I want to go today. You mentioned that you became The Sustainable Economist and started your major model portfolios because you felt bad about some of the companies that were in the index and I totally get that.

But because you’re an economist, I want to ask you from an economic perspective by not investing in bad companies, are people actually having an impact? 

Yeah, there are a couple of different approaches when it comes to this, okay? Typically, when we talk about responsible investing, you know, the first thing that comes to mind is this idea of negative screening. Getting rid of entire sectors, you know, often, this was started by the Mennonite community here in Canada. We often call them like 'sin sectors'. 

Things like alcohol, tobacco, pornography, military, you know, and personally like I’ve got no problem with alcohol but that is often one of sort of the default screens here. Another strategy is ESG integration which is this idea of environmental social governance analysis, where we’re giving companies these sort of ESG or sustainability scores and then usually getting rid of the worst of the worst, although sometimes picking the best of the best. 

And then the last thing is going to be this idea of impact investing where instead of sort of doing less evil, really, the option is doing more good. Whether that’s going out of your way to invest in renewable energy or you know, water infrastructure or these sort of investment themes on the market but there’s also this really cool sector of impact investments, which are going to be things like community bonds, green bonds, micro-finance. 

I think you’re asking me more about the market securities, things that actively trade on that secondary market, which I’ll address in a moment but really, in terms that positive impact, where a big chunk of it comes out and where it sort of indisputable is really through this impact investment. By carving up part of your portfolio and investing in a community bond from a local nonprofit or a green bond or micro finance, you know, you really are having that direct, positive impact. 

I think that side is basically indisputable. When it comes to the secondary market, that’s where things get a little bit complicated. Because obviously, unless it’s an IPO. You know, really need something to share, I’m just selling those to another investor and my little TFSA, RSP, obviously I’m not having an impact then. I’m not going to pretend that my $30,000 retirement portfolio, right, now is really having any impact there. 

But, we are starting to see this broader trend when it comes to pensions and larger pools of money. This is really where the impact is through kind of the invisible hand of the market. Obviously if I buy fair trade coffee, you know, go out of my way to do it. I’m not you know, really helping farmers that much. I don’t drink that much coffee but if everyone starts to do it, now we’re talking about systemic change throughout that supply chain. In the same way, what we really see, the impact that we see in secondary markets is through a company’s cost of capital.

If I look at something like tobacco which was probably one of the earliest negative screens, where you now have in the ballpark of seven trillion dollars in the capital markets that have completely, you know, divested form tobacco. What that means is that it’s harder for tobacco companies to raise money, either through a secondary offering within the equity market and through the bond market as well.

In my master’s thesis, 12 years ago, you know, one of the direct impacts that we looked at is that if enough investors start to sort of ostracize a sector or a company, then that’s going to drastically raise their cost of capital, limiting their ability to grow and the default, the opposite is true that if a company is a leader in sustainability, where companies are you know, a big investors are going overweight, that’s going to lower their cost of capital.

Really, we’re seeing this right now at this moment in time with coal. That coal has really kind of hit this tipping point where now, you know, especially a lot of the big European foundations and development things are just no longer financing coal. What we’re seeing is that that’s pushing a lot of new projects out of probability because their cost of capital is now much higher than what it would have been otherwise. Does that make sense?

 

Yeah, that’s exactly the kind of answer that I was looking for and it is – it makes sense logically but it is really interesting. Even though people maybe having a small impact, everybody acting together will, should increase the cost of capital for these bad companies.

You got it. Really, my dream, we’ll get deeper into it but it’s that, for this sort of ESG or socio responsible funds, you know, to have these massive assets under management for this sort of, to become a default way to invest, that’s really going to use financial markets to build a more sustainable economy.

In my mind, it’s really going to stabilize the entire economy by sort of reducing our exposure to some of these big risks. You know, whether it’s income and equality, climate change, you know, water impacts, take your pick but these are all major systemic risks but right now, are really considered like externalities and are just simply ignored by the traditional capital allocation models.

 

I’m going to ask though if – negative screening, we’re going to increase the cost of capital for these bad companies, what about the argument where like I know a lot of the bigger ETF companies now like Vanguard, Jantzi is getting more focused on proxy voting and governance. 

Is there an argument that you could have more of an impact by owning the bad companies but exercising your proxy voting rates to affect change?

Yeah, again, this is an invisible hand thing, you know? Again, my little RSP TFSA won’t have that impact but when Vanguard and Black Rock step up, now we’re talking. What I would say is that I think that the proxy voting which is really activating your shares, pushing the company in a more sustainable direction is really useful for companies that are kind of like on the fence, right? 

Where, you know, or in sectors that are like somewhat benign. Where I really think it falls apart is when we look at a company — for example, when we look at the issue of climate change and there are so many companies that are pure play, natural gas, you know, fossil fuel, oil and gas pipeline companies. You know? I remember being at a responsible investment conference probably seven or eight years ago and there is a representative from I believe it was in [inaudible], you know? 

They were just like, "Listen, we’re a natural gas pure play, this is what we do, this is why investors buy our shares. We’re not going to pivot," right? When it comes to a tobacco company or a military company, you know, shareholder engagement might get them to clean up their act a little bit. It might get them to have better health and safety environmental policies or, you know, gender diversity on the board of directors, which are all important things but we’re not going to have that sort of systemic shift.

Whereas a company like you know, one of the great examples for me is Unilever, right? Where they were really interesting and they have this CEO come in, Paul Polman. I’m not going to do quarterly reports anymore, I’m only going to do annual guidance, annual reports to give these sustainability measures sort of time to breathe.  

There was push back from investors but now they’ve started to realize that hey, actually, this gets us away from the shortermism and if you're long term buy and hold investor, which index investors like this is what we are, right? We’re long term and we’re universal owners like we own the entire stock market. 

Now all of a sudden, you know, by having shareholders on board with some of these changes, really helps these companies to shift in that direction from a longer term perspective. You know, I’m a little bit for me, you know, the shareholder engagement argument, it’s not going to be a top priority for me, right? Especially when it comes to the things I simply don’t want to buy but definitely, I do view it as a way to be able to push companies in a more sustainable direction.

Although, ideally, if I’m right about the capital market argument, as more funds are allocated with this ESG lens in place, we might not even need shareholder engagement because now, you know, companies are going to be competing with each other to get included in those indexes to compete not only on profitability metrics but also on ESG metrics.

 

I get a question about individual investor choices and how much impact they can have themselves, whether they choose to fly less, whether they choose to use less natural gas heating their homes. Because so much, I believe we can make our own decisions that have an impact before we even choose on how we invest our portfolio. 

I’m curious in the people you’re seeing and talking to have they done everything they can personally. I ask because often, we’ve had meetings in the past where someone will have a lifestyle that burns a lot of fossil fuels in their lifestyle. Yet, they want to make sure they don’t own fossil fuels stocks and portfolios. How do you square — perhaps as a philosopher, those two sides of the equation?

Yeah, I want to start the conversation with an admission. I’m a hypocrite, right? I wear clothes that have a carbon footprint, I eat meat from time to time, you know what I mean? I'll often rent cars to go on road trips that burn fossil fuels. Nobody’s perfect, okay? You got to understand that individual actions will only take us so far. I think we’ve been sold a bit of a myth that it’s like, you know, the way for us to deal with global climate change is to stop driving or flying or buy an electric car. 

Frankly, these are systemic issues. Our economy systemically depends on fossil fuels right now and no amount of personal action is going to change that. You know, really, what I would say is that two things. Number one is that you know, everyone’s going to have some carbon footprint, right? Certainly I would hope that people and certainly my clients usually go out of their way to reduce that personal impact 

But the impact that we can have with our portfolio is actually many times higher than the impact we can have through those decision individual actions. I’ll refer to a blogpost in a study that was done by a group called Co Power. I believe we’ll be able to put this link in the show notes at the end. If people want to take a look at this infographic, it’s really useful because what they did is they did an analysis, looking at the carbon impact of various activities including, you know, one round trip flight, driving a gasoline car, eating an omnivorous diet, so having meat in there. But when you look at a 100k portfolio and certainly at a 500k portfolio or a million-dollar portfolio. The carbon footprint of that investment portfolio dwarves those individual actions.

Just to give you an idea, you know, the biggest one would be eating an omnivorous diet, you know, generates about two and a half tons of CO2 per years, whereas a 100k portfolio generates 9.3 times of CO2 per year. Now, you know, bit of a caveat, obviously they looked at a 100% equity portfolio here and in their methodology, they did do a 50/50 mix of Canadian securities and international securities. So really, you know, it’s important to understand that Canadian investors have a huge carbon impact through their portfolio.

When you look at the breakdown of the TSX60, it’s overwhelmingly oil and gas, pipelines, mining companies and banks, which when we look at the holdings of the Canadian banks are overwhelmingly overweight, oil and gas, pipelines and mining companies. You know, really, it’s the type of thing where what I would say is that, you know, obviously, we want to look at every way that we can minimize our impact.

As an environmentalist, I’m constantly looking for ways to minimize that impact, you know? But we have to make choices. I’m never going to be in a position of judging to say that one choice is necessarily better or more important. But my argument is that you know, for me to avoid going to a family barbecue because they’re serving hamburgers, something like that, you know, I don’t know how much of an impact I’m going to have there where as you know, the work that I’m doing by, you know, if I can help a thousand clients invest from fossil fuels, you know, now we’re in a situation where that’s pushing towards a more systemic change, right?  

And then, obviously, we need government stepping up and more regulations, things like a carbon tax like I’m so disappointed by the rhetoric right now, we’re arguing should we or shouldn’t we, whereas it’s really the question should be, how high of a carbon path should we be having right now? This is a very clear economic issue. Then the last thing I do want to point out is that you know, for those clients of yours. You know, maybe fire, drive an SUV or whatever but in looking at this, you know, there is the ethical imperative to divest from fossil fuel, there’s also a very real financial one that you know, we are moving away from fossil fuels at a very quick rate. 

If you look at this idea of a carbon bubble, which is that so many of these fossil fuel assets are listed on the balance sheets of companies and if we add up all those reserves, that would push us way over the limits in terms of Paris agreements and limiting in climate change to one and a half, two degree Celsius. If we’re serious about enforcing and you know, meeting those climate targets, then we’re going to have to leave a lot of those reserves in the ground. 

That means, those companies are going to be riding them of which means that their share prices are going to take a very serious hit. There’s also sheer, you know, the bank of Canada has identified climate change and this idea of a carbon bubble as now one of the top five systemic issues facing the Canadian economy and Canadian investors need to be very careful on a purely financial level that if they’re heavily exposed to the Canadian market, understand that that Canadian market is heavily exposed to carbon risk.  

I could argue that those clients, you know, do whatever or lifestyle they want that this is a pretty effective risk mitigation strategy when it comes to that specific risk.

 

That’s interesting. I hadn’t heard the term carbon bubble before, that’s an interesting concept. 

Yeah. It’s now Mark Carny talked about this when he was governor of the Bank of Canada, he’s still talking about it in England, although I think he’ got bigger issues on his plate right now. With Brexit going on. You know, this is, and again, to have that most recent Bank of Canada report, come out and sort of start to use this language, we’re now starting to see every – you know, there’s something called the task force on climate disclosures, right?  

This is now basically banks are running stress test base on their climate risk. This is the first time they’re doing it and those risk assessments are not priced in to current market prices.

 

You’ve written a couple of amazing post where I think you critiqued Wealthsimple’s SSRI portfolio and also the, quite popular I believe Jantzi Index and both cases you found that a lot of the holdings and I’ve been through this as well, a lot of the holdings are major turnoffs?

How do you assess that and how do you assess whether or not it meets the criteria that you use?

Right, you know, I want to be clear that when it comes to this, everyone’s going to have a different definition, right? Everyone’s going to draw the line somewhere else and again, I don’t judge, I don’t care what people do but my clients tend to be and I’ll speak for myself, I’m a little more on the sort of tree hugging, hippie side of things.

For me, I do have pretty high expectations. But you know, it’s been such a disappointment for responsible investors in Canada. I can’t tell you the number of people who have come to me and you know, they bought something like an ethical fund, there’s a group called NEI, Northwest Ethical Investments and you know it billed as this ethical fund and then they open up the companies inside and ExxonMobil is in there, you know?

It’s like, they would justify it by saying, "Hey, we’re doing shareholder engagement." Or you know, "It’s underweight relative to their peers," but you know, I think a lot of Canadians for a long time have really been disappointed by these sort of socially responsible offerings that they don’t go far enough. You know, one of the biggest values that I do is I’m really good at like opening them up and looking at what’s inside, what’s great about ETF's, is that they’re way more transparent than mutual funds. 

Typically, the process that I go through is twofold. The first thing is I examine the underlying index methodology so I won’t get that from the ETF company itself but obviously, all of these ETF’s replicate a specific index so MSCI, you know, Vanguard uses Footsie in the case of the iShares, Jantzi social index ETF, they use the Jantzi social index which Jantzi Research was one of the first companies, a guy Michael Jantzi founded it.  

They’ve since been acquired by a company called Sustainalytics and Michael Jantzi is the global CEO of Sustainalytics. When this was created, the Gen C social index, I believe it was like the late 90s. Again, it was really this idea of you know, religious communities so the methodology they used there is they get rid of the sin stocks. Alcohol, tobacco, pornography, gambling, military, guns, things like that.

They also used that ESG research but they only get rid of the bottom 20% of the sector, based on that ESG score. They’re really getting grid of that bottom quintile of companies sector by sector and then, you know, really what’s disappointing for me is that there is no climate perspective here.

Beyond that sort of broad ESG score where carbon footprint would be a small slice of that E-score, that environmental score. You know, it was created at a time where honestly, I think nuclear energy was viewed as a bigger threat by environmentalists than fossil fuels. In my mind, it really hasn’t kept up with the time. That’s why when I look at the top holdings of the Jantzi social index, Suncore will be in there, they’re considered the most responsible of the [inaudible] companies and I’ll use [inaudible] here, although sometimes I’ll often talk about the all sands but I feel comfortable with you guys so I’m going to talk about [inaudible].That you know, they’ve got the highest ESG score of [inaudible] companies. 

That said, for myself and a lot of clients like t hat’s a no go, I don’t want to penny my money in some court. Same thing with pipelines. What’s interesting is that Enbridge is excluded from that portfolio and largely because my understanding is because of a major controversy so again, they will monitor for controversies and if it’s a major one, it will get excluded. There was a big oil spill in the Kalamazoo river, in Michigan a few years ago. I believe that was a severe enough controversy to get rid of Enbridge. 

However, Pam in a pipeline is still in the Jantzi social index, right? You’re still going to get mining companies, you’re still go ing to get – you know, and really, their methodology, it is what it is. But they’re trying to replicate the TSX60 with this ESG screen and responsible screen which they’ve done a great job of doing, the Jantzi social index is actually outperform the TSX60 over the last I think five, 10 years, right? They’ve done a really good job of doing that.  

But that you know, for me, it’s really about number one, looking at the underlying index, how far does it go, number two, looking at the companies inside and are there any in there that kind of may, if you want to gag, right? Then those are, that’s kind of how I do my analysis from there, what I do is a financial analysis to look at how closely does track the sort of benchmark. Ideally, you know, we want something that tracks the benchmark, the TSX60 or the all country world index, if it’s a global fund, right? Really, what I’m looking or companies that track the index as closely as possible with very high sort of ESG screens in the methodology. And then ideally that don’t have any companies in there that sort of don’t pass the smell test for me.

When it comes to Wealthsimple, there it is a little more complex because they use a whole bunch of different ETF’s. The issue that I have with Wealthsimple was they try to do everything for everyone. So when they created it there is a bit of bifurcation in the ETF market where you can either have socially responsible ETF’s like the Jantzi social index, which get rid of those sin stocks but still have fossil fuels or you would have fossil fuel free ETF’s that don’t have fossil fuels but still have guns and weapons and those so called sin stocks in there.  

What they did is they did both, right? So they’ve got the iShares, all, what is it low carbon target all country world index as well they have the Jantzi social index. So what this means is they still have weapons and tobacco through that low carbon approach and then they also have [inaudible] and pipelines through the social responsible approach, which you know in being everything to everyone I think they ended up kind of pissing everybody off. Because no matter what your ethics, if you’re trying to avoid these types of things, there is going to be something in that Wealthsimple portfolio that you are not going to be happy with. 

And again, you know my job isn’t really – you know I am happy to do it for my own portfolio to say, you know what my red flags are and what is a thumbs down for me. But really, I try to do that analysis and not cast judgment in terms of this is sort of good versus evil. Really I want to present people with the information and then empower them to make the decision for themselves. 

Obviously that responsible portfolio is a better step, a step in the right direction compared to their traditional portfolio. But I do think that for a lot of sustainable investors, they have this expectations and if they open up those ETF’s and actually see what is inside, it is not going to meet a lot of people’s expectations. 

 

It is an interesting point because I think that when you sign up for Wealthsimple, you get a choice. Do you want a regular portfolio or a socially responsible portfolio? And I am sure a lot of people just say, “Well yeah, I want to be socially responsible.” But like you’re saying, if you opened up the portfolio holdings in aggregate, forget about the names of the individual funds, it is probably going to piss everybody off. So that is an interesting point. 

And that to me is why you know this idea of response for sustainable investing dove tails so nicely with the DIY approach, right? Because to me it is just an absolute no brainer that really it come down to a customization. Everyone is going to have a different opinion, a different perspective, a different philosophy on these issues. Anytime you are buying a fund or hiring a full service manager, you are outsourcing it to their ethics, to their definition. Whereas this DIY approach it’s great. We can fully customize it. I have done a vegan portfolio, I have worked with anarchists before. 

 

All right hold on, back up, what is an anarchist portfolio look like? 

So an anarchist portfolio is much more heavily focused on what I would call the doing more good side of the equation but what I would say is the way I kind of – I didn’t pitch it to them, they came to me but the way is that basically this this their hedge in case society doesn’t collapse.  

The worst case scenario, no think about it Ben you are shaking your head at me but think about it that the worst case scenario for an anarchist is that the capitalism perseveres and they don’t have retirement savings and they now end up in a state long term care facility. So this is basically if you know the world goes to hell and it all falls apart then that’s fine. It doesn’t matter where your investments are.  

However, if it endures this is their hedge to be able to make sure that they can have a retirement. And then really again, we focus a lot more on the thematic sort of these broad environmental themes and scepters that are doing more good and then as well as those impact investments. Community bonds, green bonds, micro finance. What is means is that certainly their portfolio is a little riskier than an average portfolio but what we end having is just sort of more bonds to be able to account for that but like both of the vegan portfolio and the anarchist, those definitely deviated from the standard benchmarks. 

But really for a lot of these clients, if they are not doing that the other option is like keeping it in savings or under their mattress or really losing money to inflation. So I get a lot of people that come to me where they would not be investing in the market if not for my services in this approach. 

 

Fascinating and for the record, I was shaking my head like not disagreeing. I was shaking my head like this is amazing this even exist, like, "Really?"  

I’ll tell you my clients are some of the best people. I get people from all different backgrounds with all different ethical beliefs and again for me my job is not to cast any form of judgment. But really just to listen to them and hear them and then to help them understand that they do have options and what are those options and what are the tradeoffs and, you know, sometimes the fees are a little higher or you are not as diversified, right? 

But really to help them understand that and then to do it in a way where looking at asset mix and you know if you are an anarchist, you don’t want to pay taxes. So doing the tax optimization piece is really important but to use that tax through savings account to its best ability. 

 

But in aggregate, all of these people with customized portfolios are the market, right? Because if everyone else is the market, so the market plus the people tilting to avoid parts of the market they must add up to the market. Therefore, mathematically they are the market, right? So how much impact are all these people having?  

Yeah and I think for them, a lot of it is in the personal side. You know it is sort on the warm fuzzies.

And the discount, right? And so for me it’s like again, if everybody does this then we can talk about the invisible hand and then we can talk about those broader systemic shifts. You know straight up for most people, they are coming to me and the main driver is just that they want to feel good about it. And that historically they would have had to sacrificed so much. 

These socially responsible mutual funds, they just gouge you on fees. Mutual funds are already a rip off and then the SRI mutual funds are just so much higher. So for me what I am doing is really helping them do it in a way that is more in lined with their values but they actually understand what they are doing. I mean, you know, I am sure you guys know the lack of financial literacy that exists in Canada. Now take that to like environmental communities or social justice activists, they just don’t understand.  

They never have been taught these things. And most of them have an aversion to it. So now all of a sudden I am able to use their language, teach them about ETF’s, teach them about stocks and bonds in a way that is successful and in line with their values. Now all of a sudden they have a retirement portfolio that they can feel good about and, hey, like the returns have been just as good if not a little bit better than a lot of the traditional index portfolios. 

 

That is interesting. I have to throw this in there. I know I send you the blogpost that I wrote a while ago on this, our listeners are fully aware of the factors and factor investing I have looked at a couple of different ESG or SRI indexes in the past and maybe you have an idea of why this is. But they tend to have excess exposure to the profitability factor, which explains a lot of the outperformance. Yeah anyway just an interesting side note. 

Yeah and so it was really interesting. I loved your blog post, I was so excited because it’s like I am a nerd like you are and so to have you looking at this and examining it and you know we can have difference of opinions here and there but you know I love it anytime people look at this. 

So the factors that you described, so the first one was RNW, which was the what is it, robust minus weak, which is a profitability score and then the other one that you looked at was the I believe, what is it, QMJ, which is quality minus junk. 

Which are both a profitability metrics and for me what I want to communicate is that my takeaway from this is that ESG screening is a great way to get higher quality and avoid junk. And to find robust companies and avoid weak ones and so my argument is that you know we are basically comparing two strategies here. The first is just a standard all country world index. We could adjust financial metrics. The second one, still looks at all of those financial metrics. In addition, it looks at environmental social governance, ESG risks. You are going to make a better decision if you have more information. 

And so to me the gap is that in the traditional financial market, we don’t have perfect information here. We are ignoring all of these externalities in terms of environmental, social and governance issues and we see this issues pop up time and time again and has a drastic in fact on share price and I am sitting here like why are people surprised? Look at SNC Lavalin. We know what that company. We’ve known that for a very long time and now all of a sudden people are surprised? 

That they are embroiled in a controversy like this, right? Come on, the only way you didn’t see that coming is if you ignored governance issues, right? When it comes to so many of these different companies, really I would argue that ESG is this extra layer of due diligence that gives us better information that there is a business case for sustainability that is super obvious. 

You've got lower energy costs, water cost, material costs because they are more efficient. You’ve got employees that are more productive and actually really care about the companies they’re working for and then you have customers that are more loyal and often willing to pay a premium for organic, fair trade ethically sourced goods. So I did this call years ago guys. You know I was wearing my economist hat saying, “Wait a minute, higher revenues, lower costs, more productive workforce.” This is a recipe for sustainability. 

And frankly, this is what the smart money, the pension plans have now caught onto and this is why Ontario Teachers’ Pension Plan, Canadian pension plan, all the big money is now doing this ESG analysis. This is where the smart money is my fear is that it is individual retail investors that are going to be left holding the bag. That they are the ones still operating on just financial metrics, which is imperfect information, which means that they own more junk, right? 

Which means that any event of the carbon bubble bursting, they could be the ones end up holding those now toxic assets. So really to me, this is where the stock market is going. This is where the economy is headed and we can argue about how long will it take to get there. You know had you asked me 10, 12 years ago, you know where would be in 2019. It’s like oh I figured we would be past a lot of these debates. But there is no doubt that if your time horizon is 10 years, 20 years, 30 years. 40 years, there is no doubt that these very systemic social and environmental risk factors are going to have a hugely material impact on share price points. 

 

But aren’t individual investors also be backing on these pension funds that they are doing the due diligence and they have highly diversified portfolios, they wouldn’t be stockholding the bag and they end up buying all of the bad companies, right? 

Which, specifically from a carbon perspective is Canadian investors that have like a 30 or 40% allocation to the Toronto stock TSX60. That is what we are talking about and how many clients have you had come to you that have that 30 to 40% allocation to the Canadian market? 

 

Well that is low compared to the average Canadian portfolio.  

Right? So specifically on a carbon risk there and so again, there is a wide – it totally depends on the approach. But the biggest argument that I make for this stuff is that those pension plans are universal owners and index ETF investors are universal owners. Meaning that the best thing for us is a strong economy, right? GDP goes up we are all going to benefit. GDP collapses we’re all going to lose in that scenario, which means that we have a vested interest in stability. 

And when I look at the gap between income equality, the gap between the rich and the poor, I think there is a huge systemic issue to our global economy. Climate change, I think is a huge systemic issue to our global economy that really these universal owners have a vested interest in creating a sustainable equitable stable economy, which is why it is a twofold thing.  

There is the ethical imperative to this but there is a very real financial imperative to assessing this risks and you know doing what the financial industry does so well, which is efficient allocation. Which is, you know, under weighting the companies that have heavier exposure to those risks and then hedging by investing in essentially in the solutions to these problems. 

 

It is an interesting concept, I think it comes back to pricing and if there would be a benefit financially, a systematic benefit to allocating away from bad companies, as we were calling them, I think that by definition means the market is mis-pricing those risks because if the market is not then those risks aren’t included anyway. 

And I would argue that just like Warren Buffett identified reputational risk or like brand you know as value for the rest of the stock market did and made so much money, I am recognizing this intangible value. And reputation and brand in a companies sustainability and leadership and if I am right with my thesis, then you know you guys are going to have me on the podcast in another 10 years and all of a sudden, as that mis-pricing starts to balance itself out, we are going to be looking at this and my model portfolios will have continued to outperform. 

 

Right, so when you build that the products available were way more limited and I know like iShares recently released a whole bunch of great low costs ETF's. So what is the – for people building these types of portfolios, what’s the product landscape in Canada like? 

Oh it was so much better than it was a few years ago I remember and it was brutal because I had an international equity ETF that was US focused and then it ended up getting delisted. They changed it into a mutual fund, which was no longer available to Canadian investors. So I had to have like mutual funds, like F-series mutual funds, oh, nightmare. 

So now they are way more ETF’s available. iShares has come out with this whole new line up. They don’t go far enough for me in terms of the use of MSCI index that is like the weakest MSCI index. I was very jealous because in the UK, iShares released a whole bunch that were very similar but were much more enhanced ESG index as well as you’ve got Vanguard, which just came out of there. Again, very small step in the right direction but for fee conscious investors, you know those Vanguard ETF’s are as cheap as they can get.  

I think it is like 12 basis points and 15 basis points MER’s. From there [inaudible] just released a full line up of responsible investment ETFs that are low carbon as well they one that is fossil fuel reserves free, which I was really happy about and then Horizons has their global sustainability leaders ETF. ETHI, which I would consider now the most sustainable ETF in the Canadian market right now.  

The fees on it are higher. It is like 65 basis points and that is before HSD. It hasn’t been around for a full year. So I am expecting like 0.72 MER, ballpark. So it is a little more expensive but it does give global exposure and the methodology that they use is very squeaky clean in terms of those negative screens. They get rid of a lot of nasty stuff and then as well companies must have a direct carbon footprint, 60% below the industry average, which for me is really quite stringent. So people that are looking to have that sort of low carbon footprint, that ETHI option is amazing. 

On the doing more good side to the thematic investing that is where it is a little more limited really we only have the iShares global water index as a green one in Canadian dollars. There are a couple of doing more good in mutual funds. So you could look at the F-series, there is like the MacKenzie global environmental equity NEI is their environmental leaders, AGF has sustainable opportunities. You know you are looking with the F-series at an MER. You know round one to one and a quarter percent. So it is not absurd but obviously higher than I would like it to be. 

For the most part, we end up looking to the US where they’re a whole range of green ETF’s from there’s one linked to the UN sustainable development goals. There is an organic food ETF. There are a number of different green clean tech, renewable energy, so many different ones there. Obviously those are going to be a little riskier. So anytime with systematic investing, I would really caution investors, you know understand the risk, look at that data to determine volatility, understand that it is not property diversified. 

So really that should be part of your portfolio in my model portfolios, for someone with 40% bonds, 60% equities. I usually carve out maximum sort of 15% of the overall portfolio for those doing more good options. But I am really excited. You know there are more ETF’s coming out all the time. I will be real that the assets under management are pretty low still but this is a concern for me that there is more supply. But I think a lot of you know, there is a selection bias here where the type of person that wants these things doesn’t know what an ETF is and wouldn’t feel comfortable doing it themselves, which is where I step in.  

So if I am successful with my business model, we would see those assets under management rise but for right now investors do need to be cautious. They tend to be very thinly traded. So you know really want to make sure that you are doing limit orders not market orders. If you are investing a large amount, you know you probably want to do that, dollar cost outer gene and spread it out over time. So we do want to be deliberate with them. There are sort of some warts involved with purchasing these ETF's. 

But really that landscape has grown so much just in the last year. You know it has been – I did backflips when Vanguard came out with theirs. That pushed fees for everything down and then iShares and then [inaudible] and Horizon and I am just waiting for more to be available but then of course you know it gets tricky for investors because how did they distinguish and how do they pick which one is right for them and sort through it, which again is why the educational piece and I think the financial planning service I offer is so valuable. 

 

So yeah, this has been an amazing conversation and I think that you should take this chance to quickly tell our listeners, what is your service and who are you targeting and how do you help people?  

Yes, so really I help anyone that wants to invest their own money online and do it in a way that is in line with their values. A lot of my clients come to me with very limited knowledge. Some of them come to me with quite a bit and just want to hire me for an hour or two but basically I just got myself as an investment coach. So technically I am a fee for service financial planner but really what I offer is research, education, coaching. 

I am not allowed to provide specific recommendations but I am allowed to offer lists of suggestions and then what we do is we open them up. I help people understand tradeoffs and how it works. They choose the specific products that they want to buy and then I can help with things like tax optimization, asset mix and then really actually making the trades. Again, you do want to be careful with these, make sure that you are not getting ripped off when it comes to that pricing. 

So I charge by the hour, which means I am fully independent. I don’t take any commissions or sales charges and really I do operate on sliding scale. So clients will have more money can afford to pay me more money. The clients with lower assets, you know I still want to be able to help them out. So you know really by charging on that sliding scale it means that I can help anybody that is trying to figure out what to do with their money and would be comfortable with a DIY approach, right? 

It is not for everyone, some people want that full service and that’s fine. But what I do find obviously I’ve got my bias that this DIY approach is certainly the cheapest option and then from there, it also allows us to customize based on an individual unique, sustainability metrics. 

 

Very cool. All right I’ve got one more question to tack on and this is a question that we try to ask all of our guest and no pressure but I’ve got very high expectations for your answer. How do you define success in your own life? 

In my own life. So for me that is helping people. So I am on a mission, my change theory is to have one million Canadians invest intentionally. And so that is why I have the sliding scale. That is why I put a lot of my research on the internet for free through my blog. That is why I come on podcasts and I go on BNN and talk about this stuff to spread the word because I just want to help people and really I just find it you know in personal finance in Canada, so many people just don’t have that financial literacy. 

And then when they do get a little bit of it, it usually doesn’t extend to this part of people’s lives and the impact that they are trying to do. So you know, what drives me, my favorite moment is the trading meeting when we sit down with clients and all the money is inside their accounts and actually buy the ETF’s that are in line with their values and allocate part of it to a community bond or you know, micro-finance and they’re just like, “Whoa that was so much easier than I thought it was going to be.” 

And I feel so good knowing that what I am actually investing in right now that when they, when that light bulb goes on for them that just warms my heart so much. And you know my hope is if I get a million Canadians investing intentionally — again, I don’t care what those intentions are. Invest in whatever you want but just look at it and if you can do the responsible one and still earn good returns, I think a lot of people would choose that but that’s what I would hope that this would become a default option. 

Instead of going to a bank, getting sold a mutual fund, getting ripped off in fees and investing in Lord knows what companies, to have people actually make a deliberate decision and to treat themselves. If that was the default way for people to invest in Canada, I feel like everyone would be just so much better off. 

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