Socially Responsible Investing with David O'Leary | E013
Transcript:
Jason Pereira: Hello. And thank you for joining me for The Wisdom of Wealth, a show where we help educate Canadians about fundamental financial literacy topics to help you make better and more informed decisions and to know when and where to reach out for help. I'm your host, Jason Pereira. Today, on The Wisdom of Wealth, we're going to talk about socially responsible investing.
Jason Pereira: So, it comes as no surprise to anyone that sometimes companies do bad things, and sometimes they're not even bad, just things you don't agree with. Social responsible investing is all about taking into consideration different factors like environmental, social, and governance factors when deciding whether or not you should invest in a company. So whether it be pollution, the fact that they sell alcohol, tobacco, firearms or other things you don't agree with. You just, you don't have to invest in them. You can always avoid them by picking your own stocks, but that's not the smartest way to invest. One of the other options is to take advantage of mutual funds or ETFs in the marketplace that specifically provide social responsible investing options.
Jason Pereira: So how do you invest ethically? Well, it can be hard and there's different ways. But companies that specialize in this sort of thing tend to employ a number of different strategies. The first one is negative screening. What this means is they'll start off with a universe of stocks available to them and then they'll eliminate ones that are in certain sin industries or industries that they don't approve of. So, for example, alcohol, tobacco firearms, or heavy polluters, sometimes fossil fuel companies.
Jason Pereira: Then they may employ something called positive screens. So they look at the remaining stocks and they score the remaining stocks based on how ethically-minded they are. What does this mean? Well, opinions vary, but the big three factors to take into consideration are the environmental track record, the social track record, which is how well do they treat employees, consumers, stakeholders, governments, everyone as a whole and governance standards. That basically is how well do the managers act on behalf of the shareholders.
Jason Pereira: Then other considerations are taken into place as well. Specifically headline risk. Are these companies operating in a known way where they are in trouble in the media regularly? Because no one wants to own a company that they think is clean and then basically has a bad news item come up. And when you own these companies, it's not just about owning them, it's about pushing them to do better. So as a shareholder, you're entitled to vote at the annual meeting. Enough shareholders or enough shares can push management into certain directions. So a lot of these companies are known to basically push the companies they invest in to act more ethically as a whole.
Jason Pereira: So what's the end result when you do this? Well, you should end up with a portfolio that hopefully matches your values, not just the desire to make money, but also the impact that you want to leave on the world. If you don't want to invest in companies doing bad things, you shouldn't have to. Now does this impact returns? It's hard to say, there's some evidence both ways to say it's going to be better or worse, but really is that the point? If you have a problem with the way a company operates in, even if the return is going to be good, do you want to own it? If the answer's no, then socially responsible investing is about more than just return.
Jason Pereira: Now, we just covered briefly and quickly broad-based social responsible or ESG investing. But for some people investing in stocks just doesn't make enough of an impact in their community. There are other forms of ethical investing and one of which is known as impact investing. To talk to us about it, I've invited my friend and colleague David O'Leary to the studio today.
Jason Pereira: So, to help us explore impact investing, what it is, and how you can benefit from it, I've invited my friend and colleague David O'Leary into the studio today. David, thank you for joining us.
David O'Leary: Yeah, thanks for having me.
Jason Pereira: So Dave, tell us what it is you do.
David O'Leary: So I run Kind Wealth. It's a business that works with next generation Canadians, 30 to 50 year olds who help them take control of their finances, plan for their own financial futures, make sure they can reach their goals, but also help them align their money with their values and find ways to make sure that they achieve their financial goals in a way they feel good about.
Jason Pereira: Excellent. So pretty much my job, but with a real spin towards those who are really interested in ethical investing.
David O'Leary: That's right.
Jason Pereira: Okay. So I mentioned SRI earlier and explained in brevity what that was, but I also mentioned that there is a way to have a bigger impact in your community. That's something called impact investing. This is something you've been at the forefront for a while. Tell us about what impact investing is.
David O'Leary: Sure. So, whereas ESG or socially responsible investing is about investing into traditional businesses, publicly traded stocks and bonds that are behaving responsibly while they're in the process of making shoes or food or delivering their services. Impact investments are actually a different type of business. They are for-profit businesses. They tend to exist in the private market, so not trading on public exchanges. But their business is set up for the purpose of solving a social or environmental problem. And they do it in a way that generates a profit. So they have both the intention to make a positive impact and then they measure and manage that impact on an ongoing basis.
Jason Pereira: So, what they're basically saying is you don't have to... it doesn't have to be either/or, we typically think of those kinds of actions of bettering the community being handled through charities or government associations. They're saying there's a way to do this in a for-profit way while simultaneously taking some of that profit and helping the community.
David O'Leary: Yeah, that's right. I mean, effectively, there are certain problems in the world that have an economic profit that can be generated in the process of solving them. And if there is, we want to find those ways, set up for-profit ways to solve those problems so that we don't need to use charitable dollars to solve them. Let's save the charitable dollars for certain types of problems there is no way to do it profitably. So I'll take a real good example. In the case of disaster relief, a hurricane hits, you need to get emergency food and supplies into an area. There's no time, there's no ability to set up a way to make that profitable.
Jason Pereira: You shouldn't be making money out of that, yeah.
David O'Leary: Right. Let's use charitable dollars for that. We got to get people and money and food and supplies and resources in there immediately, let's do that, and let's save, let's try to solve any problem we can through a for-profit model that way so that we can use investment dollars to solve those problems rather than the precious charitable dollars.
Jason Pereira: That's interesting, because when you think about how many dollars are in the universe or in the world, you have the government money, or money they took from us, you have the charitable dollars, which we volunteer, but then you have all this investment capital out there that's chasing a return, because we all want to pay for our retirement, we all want to put our kids through school, whatever it is. And this is really smart in my mind, simply because now we're expanding the number of people who would consider putting money into it, not just organizations like governments and charities. It's the average consumer who now can say, "I don't have to separate myself from making money and doing good, I can do both at the same time."
David O'Leary: Yeah. That's exactly right. I mean, I think for a long time we grew up in a world that just sort of presuppose that if you wanted to do something positive and good, that it would inherently and necessarily cost you, you couldn't do that profitably or efficiently. And that's just not true. I think that there are, I wouldn't go too far the other way and say, "You can always make a profit in solving a problem." But sometimes you can. And so let's find those those ways. And your point is exactly right. If you add up all of the charitable dollars in the world, that amount is somewhere in the neighborhood of hundreds of billions of dollars globally.
Jason Pereira: Yeah, compared to the trillions and trillions of dollars in investment capitals.
David O'Leary: That's right. So then if we can take a small fraction of investment capital and allocate it to positive impacts... Impact investments that can make a positive good, we can flood tons more capital, we can dwarf the amount of capital that globally goes to charity for these impact investments that'll amplify the amount of good being done in the world.
Jason Pereira: And do those impact investments return the same, roughly what they would if in a similar investment outside of this type of environment?
David O'Leary: I think the answer is it depends. So certain problems are really simple, not simple, but sometimes they can be simple and they can be very profitable to solve. Other problems are very difficult, very challenging. And so you do have to concede some of the return, you might not make as attractive the return.
Jason Pereira: As I said about social responsible investing is it's not just about returns. If it's just about returns, then you don't care about the things we're talking about today. If you care about the impact you have on the world and what it is, the ethics of the companies you're investing in, then you garner a non-monetary compensation from that, and you feel good about what you're doing or you know that you're having a positive change in the world. So it's not just about the dollars and cents when it comes to this.
David O'Leary: I think that's right. I mean, I think there's a good case to be made and we can have a healthy debate about... I think there is some merit to the types of problems that we see in the world, if they go unchecked for too long, present some real risks to us as an individual and my financial net worth. If there's a massive social unrest, if climate change creates massive problems, that represents a risk.
David O'Leary: But I do think the more immediate benefit is, of course, feeling like, "I'm acting in accordance to what I believe is right. And the way that I should behave." And so I would almost go so far as to call, like, I'd like to just call responsible investing, investing, and let's talk about regular investing where we pay no attention to whether our investments have a negative impact on the environment or people, or all these things as irresponsible investing. I mean, this is just to pay no regard to it at all seems to me a little irresponsible. It would be like, if I didn't clean up my mess, I walked down the street and threw garbage everywhere. You would say, "Hey, that's pretty irresponsible. Just pick up, clean up your mess."
Jason Pereira: It's not say that every company is not a... responsible investor is doing that. It's just that, we're all somewhere on a spectrum, right?
David O'Leary: That's right.
Jason Pereira: So, let's talk about examples. Give me example of a couple of successful impact investing initiatives and not just what they did for the community, but also what the returns look like to investors.
David O'Leary: Yeah, sure. So, as I mentioned, a lot of the impact investments sit in the private markets. And so, what that means is you can easily go into a brokerage account and trade them. You have to contact a company individually and then send them wire transfer money to them or send them money somehow. And they'll offer you terms on an investment. And a lot of those are debt instruments. So they'd be some sort of similar to like a bond where they're going to hold your money for a fixed period of time and pay you a fixed interest rate. And I think there's actually some really attractive opportunities there right now, given how low yields are right now on traditional high quality bonds.
David O'Leary: These I've seen anywhere in the neighborhood of 3% to 8% type of returns on private debt. Now, the question would be how much risk is there involved? It's I think a bigger discussion we won't get into today, but we could have a debate about that. But there are some attractive yields. So to give you two maybe practical examples.
David O'Leary: So there's an impact investment offering in Canada called the CoPower. And what they do is they essentially said there's a lot of renewable energy infrastructure that needs to be created to make the transition to a low carbon economy and they finance that. Like a lot of these companies that want to build, for instance, solar panels, install geothermal heating into big buildings, they want to put LED lighting into condominiums, have trouble financing, that getting loans on traditional terms. And so what they do is they say, "We'll raise money from people who want their money to support these businesses to get renewable energy up and running." And they'll pay them an interest rate and they use that, and for instance, if you retrofit a condominium with LED lighting, we know that's going to reduce the energy bill.
Jason Pereira: [inaudible 00:00:12:23].
David O'Leary: There's a cost savings that we can then use to pay the investors some interest on those bonds. And they have terms anywhere from five-year type of lock-ins for 4% or 5% type of returns.
Jason Pereira: Yeah. I mean, it's smart, because there's a lot of capital outlay involved in making these changes for these companies.
David O'Leary: That's right.
Jason Pereira: And the benefit, though, I mean, I've seen on the solar panel initiatives, 20, 30-year benefits. So, you got to make a little bit of money for 20, 30 years, but it takes a large upfront investment. And yeah, if the banks and traditional lenders don't understand this space, they're reticent to do it.
David O'Leary: That's right. That's exactly right. And I can give you one more example if you want.
Jason Pereira: Sure.
David O'Leary: So there's another one called Lucky Iron Fish. This is one of my favorite examples. It's a small business. I don't think it has a huge... It's not going to be the next Google, but they produce, there's a doctor who was working in Cambodia. And in Cambodia, especially in rural parts of Cambodia, anemia is a big problem where you have a lack of iron in your diet. And there's a lot of poverty in large parts of Cambodia. And so, they don't get enough meats or iron rich foods in their diet, they eat a lot of rices.
David O'Leary: But they do make a lot of stews. And so this doctor, one of the challenges is iron supplementation pills, iron pills aren't fun to take, they may your stomach, you have to remember to take them. So they tend not to have a lot of uptake when humanitarian organizations come in and hand out iron pills. So this doctor wanted to solve this problem.
David O'Leary: And he realized if you had just an iron puck and it just plopped it into the stew while it was cooking, it would leach iron into the food and you'd get enough iron in your diet. The problem was nobody wanted to put an iron puck into their
Jason Pereira: [crosstalk 00:13:59] to do that.
David O'Leary: ... the uptake was poor. Exactly. And somebody had the idea to press it into the shape of a fish. And in Cambodia, fish is a lucky symbol and it sent adoption rates through the roof, because everybody wanted to have
Jason Pereira: The lucky stew.
David O'Leary: ... the lucky iron fish in the stew.
Jason Pereira: Which actually made them healthy. Right?
David O'Leary: That's right.
Jason Pereira: So, that's smart.
David O'Leary: So, they sell these to humanitarian organizations who use it to improve anemia rates. So they can very clearly outline how many people they've affected, how many rates of anemia... How much anemia is dropped. And then you can do calculations on how much cost savings that's been for healthcare, how much improved productivity there's been, because now people aren't sick. And then they sell them here in North America, because anemia is a problem here too. And they have a buy one, give one. So for people who buy it in developed markets, they give one away in developing countries.
Jason Pereira: Fantastic. So a perfect example of a company that can actually make money while simultaneously having a definitive positive impact, not just on the society today, but as you said, the long-term kind of long tail effects of this. And this is a known phenomenon economics, a lot of times we say, "Why are we going to spend money on homeless shelters or affordable housing? This doesn't benefit me." Well, actually one of the most capitalistic people of all time realized this, Henry Ford, when asked why he paid a wage that was three or four times what the average going wage was. He said, "Well, who you think I want to buy my cars?"
Jason Pereira: The reality is, is that if we have a happier, healthier, and have the just general welfare of the country would be better, the entire economy benefits from it. And things like healthcare costs go down. So, absolutely, a lot of long tail effects. So that's fantastic.
Jason Pereira: So, we talked about what it is you do. We talked about examples of these types of companies. Let's say someone comes to you and says, "David, I really like what you have to say, and you know what, you're speaking exactly my language. I want my money to have more purpose than just investing." How do you start this conversation? How do you discover what is important to them? And how do you find a match or an opportunity for them?
David O'Leary: Yeah. So when I talk with clients, we'll sit down and we'll go through a bit of a values exercise, try to understand what matters to you. So, is it things like equality? Do you care about tradition? Do you care about opportunity? What are the things that really matter to you? What do you think is right and just on the world? And we'll go through a bit of this brainstorming exercise, get some high level idea of these values.
David O'Leary: And then, as we get into that, we then start talking about trying to make that more practical. And so, the UN's put it as this global call to action on what's called the Sustainable Development Goals, SDGs for short, and there's 17 goals and they cross all sorts of different areas like nutrition and access to clean water and having clean... Gender equality and decent job growth and all these types of things that if we implement these goals, the world will be a better place for everybody.
David O'Leary: And so these are a nice lens and a lot of impact investments are framing the impact that they have on the world along these SDGs saying, "Hey, we help tackle gender equality," or, "We help tackle this SDG." And so it gives us a common language. So I help clients understand what do they care about at a big, broad level? What SDGs do those map to? And then that gives us a key, because a lot of impact investments talk about which SDGs they map to.
David O'Leary: So now we have a way to say, "What do you care about? Here are some investments that I know are tackling the problems that you care about and matter to your values." And then I give them a list of, "Here are some of these organizations, here are the types of terms on their investments, the types of returns." And we help think about what makes sense for them based on the risk and return profile of that investment in their context, in their portfolio.
Jason Pereira: Excellent. So that's the client piece of it, but where do you find all these initiatives? Because, I mean, like you said, there's a lot of small, private ones. So, I know that there is a impact or sustainable investing index being developed out of MaRS, the innovation center in Toronto. But it's not like you can go on Google and type in ticker symbols like Google or Facebook or whatever. How do you find them?
David O'Leary: Yeah. Unfortunately it's still really tricky, this is an issue that is a problem. There is a crude existing database called OpenImpact, so Openimpact.ca. As I mentioned, it's a very light database, but it has a catalog of all of the impact investments that they're aware of in Canada that exist. And that's a hundred plus individual investments. But it doesn't have a lot of robust information. So you're still in a case where it's... And not everything is included there all the time. So it is a lot of, it's a nascent space still, it's growing, but it's not easy for the individual to just press a button and make some investments happen like we find in traditional investing these days [crosstalk 00:00:18:49]-
Jason Pereira: I [crosstalk 00:18:52] myself on out and just [inaudible 00:18:52] 500 bucks and buy something tomorrow.
David O'Leary: Unfortunately. So you have to be really, it's a smaller group of people who are doing it right now because you have to be really motivated, you have to do extra legwork. And for people like me, it's a lot of just going to conferences, speaking to people, having your ear to the ground. But it's not as simple as, "I'll just go to Morningstar or Google or whatever, and look up these investments."
Jason Pereira: Yeah, it isn't this one hub. Interesting. It's a challenge. So, David, thank you very much for taking the time to come in. Where can people find you?
David O'Leary: So kindwealth.ca. I also host a podcast on impact investing. So it's called The Impact Investing Podcast, very creatively named. So you can look up both of those places or DavidOLeary.ca is where I also host the podcast. So check out any of those links.
Jason Pereira: Excellent. Thank you very much for taking time to come in today.
David O'Leary: Thanks for having me.
Jason Pereira: Yes. And thank you yet again for taking the time to join us today on The Wisdom of Wealth. I hope you learned a little bit more about taking control of your financial life and until next time, take care.