James: What is up everybody? Welcome back to the Dentist Who Invest Podcast, a much requested episode on ESG investing. It’s a bike time. We did something about this topic because a lot of people ask me about it, and I’ve got. In the house expert today, Jon Doyle stood here in front of me, who is an FA. How are you my friend?

Jon: I’m very well, thank you. I’m very well. How are you doing? 

James: I’m smashing my friend. And you know what? This episode today, I’m here to learn as well because I know what ESG investing is. But by my own admission, I haven’t done nearly enough research into it. So Jon, maybe it might be nice for you to do just a quick intro about yourself and then we’ll jump straight into ESG investing, what it is, how does it work, and how do we take it into consideration when we’re designing our portfolios.

Jon: So as you said, my name’s Jon Doyle. I’m an independent financial planner. I run a company called Juniper Wealth Management. We’re based up in Lancaster, but as you can probably tell for my voice, I’m a southern lad grew up in the New Forest, daddy was a dentist. , hence working with dentists as well.

So, 14 years now as a financial advisor working in, not only traditional investing, but ethical and socially responsible and ESG environment, and something, probably about 60% of our clients have some form of ESG integration in their portfolios. 

James: Got you. And on that note, ESG, let’s break it down like you’re explaining it to a five year old.

Bear in mind, you’re talking to us dentists who have no financial background whatsoever. ESG, what is it? Let’s start from the bottom up. 

Jon: Well probably best to start with a bit of history. Because there’s a lot of terms and I realized I just threw a load of terms in, even in my introduction so if we go like all the way back to the, say the 1960s with investing, people’s main intention was just to make money. Call this traditional investing. But then you had a few kind of charities or very very ultra high net worth investors who wanted to not invest in certain things.

Mostly for religious reasons. We had the birth of ethical investing or socially responsible investing. And then as you flash forward to about 2005, the United Nations came up with this governance policy called ESG. And that’s where this kind of middle ground starts to come in. And as advisors often we conflate all the different words together, but they do mean different things.

So ESG is environmental, social, and governance. And it’s a way of looking at a company and giving it a score or a rating based upon its impact on the environment, its impact on society and its governance as a company, so how well it’s run. 

James: Got you. Interesting stuff. So how does that conversation typically go when you’re consulting a new client and they say to you, Okay, John, what I want to do is I want to have some sort of ESG consideration in my portfolio.

what would you in turn say to them next? Would you say, Okay, well, I would advise you to go partly ESG, partly traditional, because what I would assume is that the returns are better if you have a diversified portfolio across more traditional markets rather than ring fence, than you’re in ring fence and yourself in to one particular subsection, would that be the case or how does that typically look or would you say full steam ahead where it’s at these days, that’s where you’re going to get the best returns? 

Jon: So, in terms of do they return better? because that’s probably the easiest one to answer.

 what I’ve tended to find is they’re kind of zig and zag. So when one’s doing outperforming, the other will lag a bit and then you get this crossover. Mostly because with ESG you’ll tend to filter out sectors like oil and gas or tobaccos and things like that.

They’ll tend to not be in there. Now, if you look at the last sort of 2020, ESG portfolios absolutely flying because it’s filled with tech stocks, it’s filled with Tesla, it’s filled with Google and all these big companies. But then over maybe the last 12 months as oil and gas prices, where we all know what’s happened with those you’ve seen the sort of traditional investments claw back and maybe overtake, and so I find it’s a bit of give and take, which is why my question comes more onto what values are we trying to achieve with ESG? 

So our investments is, it’s about aligning values with your money. Because for some people it’s kind of, it’s really, really important. Maybe there’s like serious ethical considerations they’ve got. So they’re really far on the spectrum. They’re living a vegan life, completely at one harmonious and hippie and tree hugging and everything, for others it’s actually, I just want my money to do so good. I just want to feel like I’m not making the world worse than when I joined it. For others, just absolutely no real consideration. We just continue with traditional, so we have a big conversation around values and what it is we’re trying to achieve with investing, maybe with a socially responsible or an ESG hat. 

James: That’s completely reasonable because I suppose people might come to you and they say they’ve heard of ESG and they say, “Oh, well that sounds good. I want to partake in that”. But actually what ESG means to one person is totally different to the next person. So I’m really interested actually. So how does that conversation look then? So you had asked them specifically about their religious beliefs how do you quantify how ESG someone is.

Jon: We have two approaches to this.

 we’ve got one that’s sort of stipulated from a regulatory point of view where we give our clients yet another questionnaire to fill in and they tick all the boxes and that can be useful because you can see they’re really concerned about animal testing or they’re concerned about alcohol but then you have this wider conversation. Actually, I’ve got a whole slide deck where I take clients through big part of it’s about educating them why we invest the way we do, why we do the things we do, and I’ve got what I call a Venn diagram on steroids of where all these different areas overlap with each other.

Because the surprising thing for a lot of people is that an ESG portfolio has most of the same investments is a traditional, and it’s just the fringes of the companies that you’re kind of getting rid. They’re bad actors as it were, what you’re trying to achieve anyway. And so you can talk to people about, well, is there somewhere along this spectrum that you feel that you are landing on?

Are there specific things that you are really against or is it just a general approach that you’re trying to take here? Sometimes you’ll get someone who just turns around and says, in one conversation had, they were like, “I don’t want to invest in boohoo”. It’s actually a practice manager, a dental practice. This one, “I don’t want to invest in boohoo”. So then you go and have a conversation. You go, Well, the amount of money we’re investing, the cost of implementing a portfolio that only excludes boohoo is not going to provide you any value from an investment perspective. 

James: I hear you and presumably that’s boohoo because of fast fashion.

Jon: And the whole controversy, you’re a lockdown of pay paying people three pounds an hour in Lester and all this kind of stuff not a great company but we use index funds a lot and we’ll talk about indexing and ESG I’m sure later. But I’ll then approach it with and with that conversation, as we’ve got a portfolio with say, five or 6,000 investments in it and one of those is boohoo and you’ve got a hundred grand invested.

What are we going to have invested in? Boohoo? A quid, two quid. How comfortable are you with that? If we know that generally we’re taking approach where we’ve got good companies for the environment, good companies, socially good companies on the governance side. If one or two slip through. 

James: Got you. So it’s a conversation effectively.

Jon: Very definitely. 

And different people will have different abilities to bespoke we do some work with charities we’ve got a multimillion pound portfolio for a charity. We’re able to go very specific for that charity Because we can individually screen things out because of the size of the portfolio and then they’ve got the social risk of that charity invested in bad lending practices. Not very good because the charity’s kind of trying to help people out of poverty so gets very important on those things. . 

James: I can imagine. It’s a PR thing. Absolutely. So who’s on the naughty list when it comes to ESG investing? Who are the no-nos, the people that are blacklisted and they’ll never, ever be in an ESG portfolio.

Jon: That’s a really, really interesting question because there’s some surprising companies who are in ESG portfolios. So you might think that an oil company would never hit an ESG portfolio. 

James: That would be a reasonable assumption. That’s actually who I was thinking of when I asked that question.

Jon: So, Shell has a double A rating for ESG. 

James: Wow. 

Jon: It is the most surprising one. There’s a great tool and I’ll send you a link so you can put it in your show notes. But, we use MSCR, a big index provider. We use their methodology for our ESG and socially responsible portfolios, and they’ve got a tool you can go and you can lock up any company that’s listed in the world and look at their ratings why they’re rated the way they are. 

Shell have got a really good climate impact target and they’re on target to hit that two and a half degree increase on, climate change decarbonize. And then they’ve also got really good governance, really good corporate behavior.

So Shell actually end up as double A. Higher rated than Tesla. 

James: Really? Wow. So it’s not as intuitive as you might think or It’s definitely not like these people are bad, this industry’s bad, this industry’s good. Something like that. And just to clarify, double A, I’m guessing like the best rating is like triple A or something like that, so they’re one off the top and then what do the ratings go down to? 

Jon: Like C? 

James: Alright wasn’t expecting that from Shell, but there you go. And then, well, I have read a little bit about them, that they do plant like X number of trees for every well that they find or something like that. There’s, there’s some, 

Jon: It’s no sorts of things. You know, carbon capture, carbon offset investment in renewables. They’re going to be making strides towards hidden climate targets. 

James: Got you. Let’s look at the cool hard numbers and we touched upon this a little bit earlier, now you said that obviously tech, Tech in like what 2019, 2020 was flipping booming like the Nasdaq and what have you? Nowadays over the last year or two less so, but then again in investing terms, those are tiny timeframes, like really small timeframes. So overall, is the data there yet to say that ESG can actually outperform traditional investment or just buying the stock market? Buying the market? 

Jon: No is the honest answer that there isn’t enough data yet , to show that ESG is like a factor in the same way, like small cap or value investing or growth investing would be a factor, that you could look at and say. Academically speaking, it will produce outperformance. There isn’t that data there yet. 

James: I thought you might say that because it’s only really, I’m guessing a lot of these funds have only really been around for maybe. I don’t know, under a decade. 

Jon: So do you think sort of 2005, the UN came up with the phrase ESG? It takes a few years for it to start filtering through and then most of these funds, this fund management industry is classic for this. They launched them when it’s, Popular. So like if you look at where the money’s come from, it’s like mostly in the last two-three years, so there just isn’t that sort of data.

Probably the best one to look at if you’re looking for long term data is the FTSE4Good, which was sort of launched in the early nineties, I think, that was more ethical than ESG, but there’s obviously a big overlap. so the FTSE4Good could be quite an interesting one to look at.

James: That’s interesting. And FTSE4Good, I’m guessing, I’m reading between the lines, and I’m going to say that that’s a tracker fund. 

Jon: They have a range of Tracker funds with the FTSE4Good. 

James: Right because obviously that would mean that it’s not active, which would mean the fees are less, which is you presume most ESG ones are active. Right? Well, I’m guessing that they are. 

Jon: As with funds in general, most funds out there are active, but there are an increasing number of ESG and SRI socially responsible, index funds out there. So the portfolios we run at JU index funds both the socially responsible ESG and the tradition.

James: So I’ve just heard you, I’ve just picked up on you using another term there, socially responsible versus ESG and I’m going to guess there’s some slight difference that sets those two apart. There’s some distinction in there. 

Jon: Yes. So ESG is where you just get rid of the bad actors, but then socially responsible, you are saying, Well, there’s certain things I just don’t want to invest in.

Now mostly with those, it’s the kind of the popular sins. You’ve got tobacco, you’ve got oil and gas, you’ve got guns those sorts of things would get screened out. Alcohol is generally thrown in there as well. So things that are kind of seen as, The most common things people want to be out of, and then you get a socially responsible portfolio.

James: That’s interesting. So obviously, we can’t go into specifics and tailor advice in this podcast, but when someone comes to you as an individual, as a client for your services at your financial advisor, your company would you ever say to them, Listen, I’M act, Would you ever actively say, Listen, I think that you should at least have some with your portfolio in ESG, in ESG based one because of X, Y, and Z? Or is it more a client led discussion that you let them come to you and ask, Actually, this is what I’d prefer to have, or would you ever guide into that, into investing in those things from the point of view that you genuinely think that they can maybe get better returns or part of their portfolio should be this, be in this for whatever reason. 

Jon: So my default is to go one foot in both camps, you know, less split 50 50 between a socially responsible and a traditional approach. 

James: Really? So that’s actually your default for a new client? 

Jon: Yeah. Yeah, because when I speak to most people, they go, Well, I kind of think it’d be a good idea, but I don’t want to lose out. And, you know, I don’t, they’re kind of middling about it anyway. And if you’re kind of undecided and you go, well, I’d like a bit, but I don’t want it all. Then 50 50 seems like a reasonable approach to take it kind of it’s actually worked really well over the last couple of years because it’s evened out the out performance and under performance of the, the two portfolios. You’ll find a lot of our advisors will argue about this and I’m sure they’ll, some tell me I’m , I’m wrong, but, You know, what we then tend to do is based on the conversations is we’ll wait it one way or the other. So I’ve had some clients who turn around and say, You know, I don’t want any of that. It’s all hippy nonsense and all traditional. And then, then others who will go, it’s really important to me and will go full, full socially responsible. But the one foot in each camp kind of seems to be quite comfortable. It’s the compromise approach, I guess. 

James: That’s cool. That’s interesting. And I know we said the data wasn’t there just at the start to say. What these, what the returns are going to be on these long term, but are you able to pluck some numbers off the top of your head in terms of average returns? Say for that? The, the fite one that you were talking about earlier. How much is it appreciated on average every year? And I get that the timeframe’s not long enough for us to say what that might be going forward. But let’s compare it to the s and p, which is what, like 9.1% total returns if you include dividend. What I’ll do just really curious. 

Jon: If you give me just two sets, I’m just going to pull up, We can pull those. What I’ll do is I’ll pull up the portfolios that we use and we’ll hundred percent equity because if we’re comparing to the s p. Then hundred percent equities where we’d want to be looking. 

James: Totally. That would be really interesting to know. But just as I say, just to reiterate what we said earlier, anybody who’s listened to this, it’s not the only metric to make a flipping investment decision what it’s done. And I actually see this all the time that people see returns as the only metric really. There’s a lot more to it, but I’m just genuinely curious, just straight. How that compares or how that looks. 

Jon: So these portfolios have the same asset allocation as in global asset allocation. And the same equity. Allocation’s a hundred percent equity. But if we’re America, it’s, you know, the same percentage is allocated to the US. So if we look at five years on the, socially responsible, the returns been 10.28% per year. Okay. After investment costs, but before any advisory costs. And then for the traditional it’s been 7.07 for that same period. And largely, like I said, largely that’s down to the, the responsible having a higher weighting to tech, which over the last five years has done particularly well, versus sort of more traditional waitings to oil and gas and other things. So it’s, the waiting has been favorable over this last few years, but five years is not enough to say this is a repeatable pattern going forward. 

James: Totally. And is there any data on that over longer time frames? Maybe 10 years, something like that?

Jon: I don’t have any for the portfolios that we run, because those indexes that are within it and the funds haven’t been around that long. But I probably, if we you fill for a moment, I can jump into . 

James: Absolutely. Absolutely. So I mean ESG investing, I’m here to learn as well on this particular one and it’s one that gets requested on the group, an absolute ton. And I feel like for me, the whole point of this podcast is part of it is to actually delve down into the nitty gritty, because I feel like there’s going to be two camps out there is going to be the people who see it as something hugely important. However, they’re also a little unsure because they don’t know, this gonna compromise their actual returns to some degree, which, you know, this is why we’re delving into the returns here at this point. But we’re also quick to caveat everything and say, listen, the reality is the timeframes are not long enough to really draw any serious conclusions. So, let’s look at it straight up from the point of view of people who. Want their portfolios to grow at the greatest rate. Maybe it does make sense. Okay, maybe it does make sense to have some ESG but at the same time, would you want to put all of your wealth into it at this stage, probably not, but it maybe actually makes sense even from the point of view of someone who just wants to accelerate growth in their portfolio and actually get better returns.

Jon: I think, I would expect it to pick up similar returns to the index as a whole because you know, when you’re talking about how many companies are going to be held within an index compared those that would be filtered out on ESG, you’re not going to be screening out loads and loads of the market.

But what you’ll have is pockets of performance where certain sectors will be outperforming or lagging, and that’s where you’ll get your difference. But over time, that will generally even out. And more and more companies are starting to produce the information that ESG rating companies want and also produce the target. So more and more companies will be getting pulled into the ESG rating system. 

James: Maybe even if we were just straight up, be able to see the returns of that one that you mentioned earlier FTSE4good That’s an interesting one. Maybe that might be the best place to go. And then what we do is we. The average total returns, I suppose, on that. We just, it would be interesting, but we’ll see what we find on that one. 

Jon: I think one of the things that’s a really interesting discussion at the moment is what is ESG actually doing to improve the companies that are being invested in?

James: Okay.

Jon: Is it enough to invest in? Is investing in an ESG actually making these companies better? 

James: So what are those figures now that you’ve pulled them up, Jon 

Jon: Okay, so this is the FTSE4good. It’s UK one, so you’re probably best comparing it to say the Foote 100 over the same period. But from October three, Till now, it’s done 161%, as a return and if I just quickly add in the index.

James: Totally. Get some cold hard figures on that one for comparison. 

Jon: Versus the Foote 100 over that same period there we go. FTSE100 over that. Period’s done. 258% compared to 161% for the Foote. 

James: So slight compromise there. 

Jon: I’d say particularly when we’re looking at UK. It’s going to be around, oil and gas and British American Tobacco, British Arrow Space. You know, we’re losing out on those companies, which are quite big constituents of the FTSE so that’s where the FTSE4Good is an ESG plus ethical screening fund. And it will lose out during those periods, but there’s been periods of outperformance during that time. 

James: But there you go. I mean, What you’re saying there is basically, is it a fair comparison on when you’re talking about that specific index, because most of the FTSE is flipping legacy companies from however long ago, mining companies and all these ones that tend to not be looked upon so favorably by ESG investors and hence don’t make the cut when it comes to, that particular fund. So, It’s an interesting one. You know, it’s one of those things it’s really hard to make science on something like this because there’s so many variables, you know?

And just things to consider you. So obviously when we invest in these ESG funds and we feel like we’re doing good for the environment and we feel like we’re supporting these companies that are ethical, they’re here to help here to make the world a better. But would you say that it’s actually fair to say that when we purchase these, that our money is going directly to these companies and it’s being put to good use?

Jon: Well, at the moment there’s a really big debate about this. You know, because ESG has exploded over the last couple of years. There’s big debates around how much of its greenwashing, you know, So there’s a lot of investment management funds that have just renamed their fund. And put ESG in it because most of the funds within it were okay for ESG purposes. But the actual content of the fund hasn’t changed. And they’re not actually doing anything from an engagement perspective either. So I think this is where the values thing really comes into it when we’re talking with a client about why are we wanting to invest this way? Because if we are wanting to avoid things, Because it impacts on our ethics, then absolutely we 100% want to avoid these things. But if we are trying to actively make companies better, I think there’s a really strong argument to say that index investing in the general market is as good. As a pure ESG approach, because when an index investor, you know, the biggest index investing company in the UK is legal in general they’re the biggest shareholder on the Foote when they’re buying these shares on behalf of their investors. They’re buying them knowing they’re not going to sell them. So what do they do when they’re on their earnings call with Shell and the shareholder? You know, AGM. They vote with a long term mind, they vote with an ESG mind. It was index investing companies like Vanguard, like legal in general, like Ihad, who pushed for decarbonization within companies like Shell. And push them for this climate action. What are you actually going to be doing about it? because we’re still going to be holding you in 50 years time for our pension investors. So I think there’s a really good argument to make that investing in a general index portfolio, if you’ve got the right index provider. Is as strong and is going to have as strong an impact as an ESG portfolio. Because they’re still going to be driving that change in those companies. But you will have investments that may be conflict with your ethics. and that’s where we have this, We don’t really do much pure ESG. We do the socially responsible where we’re saying, We’ll move all these ones that conflict with our ethics out as well as have the ESG in there. Or we’ll go traditional. We do have a couple of clients who’ve chosen to go down the ESG route. Mostly it’s the socially responsible or traditional or a mixture of those two. 

James: Awesome. So really, really, really nice round up or summary of ESG Invest in there. Just to put a cap on everything that we said today, short and sweet, powerful and punchy. Tidbits of advice for anybody who wants to, place wants to have more exposure to ESG in their portfolio. What can they do? How can they go about it? What are the things that they can do to investigate these funds, at least to a cursory level so that it’s something actionable that people can implement. 

Jon: So if you want to know whether the funds you’re investing in have. What their ESG ratings are like. There’s three tools provided by N SCI that we use that are free. So again, I’ll send you the links and we’ll pop those in, in the show notes. One of those is to look at companies. One of those is to look at indexes, and one of those is to look at funds and you can then drill down into your funds and see what the pros and cons are. So if it’s something you really care about, you can look at them and see what’s happening. With all of this stuff, just have your own philosophy about how you want to invest, do your research, and then stick to it. Don’t go into ESG because it’s the latest fad and the newspapers are telling you it’s doing right because the more we follow the wind, the more we’re going to get blown over, we want our philosophy, we want to stick to it, know why we buy things, and then you’ll know when it’s time to get out of them. So that’s why I’d go values over doing it for profit 

James: 100%. And the media. They don’t do investors any favors really, because it’s made out like it’s this supposed to be this flippin, frantic, high energy thing where you’re jumping into this fund, you’re jumping out of this one because the world has changed and now we need to do this or this is a current trend. Like, you know, when you see on, I’m not going to name any names, but certain financial literature institutions that I’m subscribe to my mailbox. I don’t even know why sometimes, because I don’t read the stuff that they send me it’ll say things like, is not the time to invest in uranium and stuff like this. It’s like, that’s just so stupid. You know what I mean? As if now is the time to go ahead and jump into it. Whereas, I mean, for me, even if you, even if you did buy some uranium and you made more returns on that than you might have expected, you would’ve done otherwise. The thing about it is you have to actually think to yourself, at what point am I going to take money out of this to actually realize this gain? Because chances are it’s going to rebalance or it’s the rest of the market’s going to catch up due to the law of averages. And then for me, if you’re doing that and you’re jumping in because you’re getting swept away in the wind, just as what you said earlier, or you’re getting caught up in. Title, wave or frenzy for this particular asset, right? What’s the end goal? What is the end goal? And realistically, if you’re not gonna do that, it might have been easier just to buy. Use the tried and tested techniques to buy the market or buy the average. Because realistically for you, that would be the best thing to do in the long run because you don’t have the time to have these more short term jumping in annoy of the market strategies and all I would, and I’m not, this is not me saying that, you know, don’t invest in ESG and don’t do all of these things. What I am saying, just, it kind of aligns with what you’re saying effectively. If you’re gonna do it, stick to your guns, find a fund that works for you, okay. And then have it as a portion of your portfolio. And then what that means is that you can consistently invest in it and see some returns that are more aligned with your beliefs.

Jon: The values thing becomes really important because if you’re in that foot seat for good and you’ve lagged the market, But you know, you’ve done it without conflicting with your values. Would you have wanted those returns in the first place? If it’s from the things that you can’t stand? So you have to be happy with the returns you get because it’s stuck to your values. If it’s not your values, then don’t go down that road because it’s, you know you’re going to be restricting your investment criteria needlessly so. That’s why we have this kind of half and half. Some people, they really value it, Some people that don’t. Rsg socially responsible stuff, very, very broad. You know, it’s got 8,000 holdings compared to 10,000 for the wider market once. So it’s not like we’re completely narrowed at the focus of the portfolios. 

James: Got you. Really interesting though that that’s a conversation that you have with every single client I had no idea that things had developed to that level. 

Jon: Might just be me, mate.

James: That’s cool here’s the thing. Even if it is just you and your practice, it’s still really cool. You know what I mean I had no idea certainly that it was that far along, but yeah, food for. John, thank you so much for your time today. If anything that you have said has interested anybody in the podcast who’s been listening to the podcast, where can they find out more about you? 

Jon: My Twitter and Instagram is just Juniper, Juniper_John. You can find me on LinkedIn or our website juniperwealth.co.uk 

James: Top stuff. Jon thank you so much for your time today, an interesting episode on ESG investment. We’ll catch up really soon. 

Jon: Yeah, yeah. Great to speak.