At One Day In July, our approach to environmental investing is grounded in the fiduciary obligation that we have to our clients and in the desire to provide solutions that are targeted and truly impactful.
As a fiduciary, our obligation is to always put the interests of our investors first. This is as true for environmental investing as it is for any other portfolio we manage. We believe that it is not only possible, but imperative, that we meet our environmental investing goals without sacrificing the core investment and fiduciary tenets that define our firm. Among those tenets are the following:
Based on extensive research, we do not believe that active management will consistently beat a simple indexing approach over time. Our strategies utilize a variety of exchange-traded funds (ETFs), each of which seeks to passively track the performance of a particular market index.
Standard broad market indexes like the S&P 500 contain a material allocation to companies that may be considered less environmentally friendly, including energy companies and utilities, among others. However, it is now possible and relatively easy to invest using indexes that are specially constructed to prioritize environmental investing and reduce or eliminate these exposures.
The ETFs we utilize provide access to thousands of different stocks across a variety of industries, company sizes, and geographies. This reduces risk concentrations, preventing any single company from having an outsized impact on the portfolio’s returns.
Environmental investing should not mean high-cost investing. Our advisory fee schedule is the same for environmental investing portfolios as it is for all of our other portfolios. Further, in deciding which ETFs to utilize for these strategies, we have designed screens to exclude higher cost funds. As a result, the weighted average expense ratio for the combined ETF portfolio is typically between 0.1% and 0.2%.
We seek to utilize ETFs that are relatively easy to trade when necessary, even during times of market stress. Smaller ETFs with a limited investor base may be difficult or costly to trade when market conditions deteriorate. For this reason, we emphasize ETFs that have scale in their asset size and a high level of average daily trading volume.
As with all One Day in July portfolios, our environmental investing portfolios primarily utilize United States Treasury securities for the bond component. Treasury securities have historically performed better than other fixed income instruments during significant stock market sell-offs. The use of Treasuries provides an element of stability and helps to limit downside risk, which may be particularly important for clients that need to access the portfolio for cash on a regular basis.
Values-based investing is ultimately about making an impact. We believe there are key elements in any firm’s investment approach that help to determine how large that impact will be. With that in mind, we have designed our process to address the elements we think can be leveraged to generate the greatest impact.
Many ESG (Environmental, Social and Governance) investment strategies attempt to be all things to all people. We believe that the large number of different ESG metrics, ratings methodologies, and weighting schemes currently used by advisors and fund managers is as likely to cause confusion as it is to help investors make informed decisions that align with their priorities.
Further, attempting to solve for so many criteria at once may instead lead to mediocrity across all of them. For that reason, we have chosen to focus our efforts solely on environmental investing, and in particular the criteria related to climate change. Our discussions with investors, coupled with the collective and existential nature of this issue, leads us to believe that this is the area of greatest concern for the majority of people.
Even within the environmental investing category, the number of available metrics and criteria can lead to paralysis in decision making. As one of our primary goals in everything we do is to simplify things to the greatest degree possible, we have narrowed our target metrics to two: fossil fuel reserves and carbon intensity (a measure of CO2 emissions). We believe these two metrics are closest to the core of the climate change issue. They are also measurable and can be understood by investors. We therefore seek to build portfolios that minimize exposure to these two metrics while still meeting our fiduciary goals.
We do not expect our approach to remain static over time, and we will actively seek ways to improve and evolve it as opportunities arise. For example, the availability of scaled, low-cost environmentally focused ETFs is likely to continue to expand. This may present new opportunities to invest in more impact-oriented funds (e.g. clean energy funds) without sacrificing the core principles of low fees and strong liquidity.
More than ever, investors are seeking to align their portfolios with their values. Our more focused approach to environmental investing is designed to accomplish this for investors who harbor significant concerns about climate change.
In addition to providing strong long-term investment results, a critical goal of any environmental investing portfolio is to advance the achievement of a desired environmental outcome. Our approach connects our investors to a growing wave of capital that is being directed away from environmentally damaging industries and companies and toward environmentally friendly businesses. The larger and more publicized this wave becomes, the more likely it is to have economic repercussions for the companies involved. Decreasing the overall demand for a company’s securities may have an adverse impact on that company’s cost of capital, which may in turn have a negative impact on that company’s financial results. When applied in the proper size, investor and consumer pressure has led to positive societal change in the past, and we believe that is possible here.