Sustainable Investing (ESG, SRI)

Individuals and large institutions alike are allocating more of their dollars to investment strategies that meet some level of environmental, social, and governance criteria. This is commonly referred to as responsible, sustainable, or green investing.
Referenced in this video:
- 2018 GLOBAL SUSTAINABLE INVESTMENT REVIEW www.gsi-alliance.org/wp-conten...
- Sustainability as BlackRock’s New Standard for Investing www.blackrock.com/uk/individu...
- The Contributions of Betas versus Characteristics to the ESG Premium papers.ssrn.com/sol3/papers.c...
- Disagreement, Tastes, and Asset Prices papers.ssrn.com/sol3/papers.c...
- A Sustainable Capital Asset Pricing Model (S-CAPM): Evidence from Green Investing and Sin Stock Exclusion papers.ssrn.com/sol3/papers.c...
- Sustainable Investing in Equilibrium papers.ssrn.com/sol3/papers.c...
- Aggregate Confusion: The Divergence of ESG Ratings papers.ssrn.com/sol3/papers.c...
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PWL Capital Blog Post: www.pwlcapital.com/sustainabl...
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[@BenFelixCSI]

Here is the blog post accompanying this video: www.pwlcapital.com/sustainable-investing-how-will-it-impact-your-returns/ If you would like more information on this topic, it has been discussed numerous time on the Rational Reminder Podcast. Episode 63 features a Canadian economist, Tim Nash, who specializes in sustainable investing. Episode 82 is similar to this video. Episode 84 has follow up commentary from Tim Nash regarding Episode 82. Episode 100 features Ken French who gives his take on sustainable investing. Tim Nash offers commentary on Ken French's point of view in Episode 115. rationalreminder.ca/podcast/63 rationalreminder.ca/podcast/82 starting at 12:00 rationalreminder.ca/podcast/84 starting at 53:10 rationalreminder.ca/podcast/100 starting at 45:52 rationalreminder.ca/podcast/115 starting at 1:03:39

[@drmsgp]

how about ESG in developing country? does it have any benefits in boosting return/risk?

[@tomharrison6607]

bullshit bullshit bullshit esg elites slimey grift

[@tomharrison6607]

@@drmsgp sri lanka see how esg bullshit is going there also the netherlands

[@ZelenoJabko]

ESG = go woke, go broke

[@lammertjandam]

Hello Ben Felix, this is Lammertjan Dam, one of the authors of the paper you discuss... I must say, you do a great job explaining our paper, probably even better than me.... Anyway thanks for your interest in our work. Cheers!

[@BenFelixCSI]

It is very cool to see you commenting here! I'm glad to know that I explained your work well. I hope that I pronounced your name properly. Thank you for the paper and for commenting!

[@lammertjandam]

@@BenFelixCSI It's more like La-mirt-yawn Dum, but its good enough ;) at least you did not switch first and last name that happens a lot. Anyway, we really appreciate the exposure. Thanks.

[@f3wbs]

Just the video I needed! BMO came out with new ETFs that have ESG in their title and even though I'd heard of it before, I didn't know what it was. Thanks Agent 47.

[@BenFelixCSI]

haha you're welcome

[@Tuxedo_Cake]

I didn't even know this was a thing. Best channel on KZbin, I learn so much with every episode.

[@alexl266]

Was just starting to think about this topic. Thanks for making a video on it!

[@user-wr4yl7tx3w]

Best analysis seen so far. Something Blackrock never highlights.

[@ericgoto2459]

I was just wondering about this topic, thanks for the video

[@cparkrun]

Hi Ben, I just wanted to say I'm a huge fan of your videos. I have learned a ton, and this might be my favorite one to date!! Thank you for providing consistent, high quality content. (Also idk if others have pointed this out, but FYI there is a small error at 10:37 with the names shown in the image).

[@luisalmas3743]

Great stuff Ben. I've read about this on a blog before watching your video, and can say that I feel I'm much more well informed now, considering the two sources. Keep up the good work!.

[@emmanuelwilliamquinton9152]

Great video exactly what I was looking for, probably quite a bit more to be looked at on the subject

[@antonmaier2263]

You are part of the new class of web-content right next to the exceptional new kinds of content.

[@KHAMDEYEVBI]

I so much like the tone of your videos. Nice presentation. References to actual case studies. Good visualization. Keep up the excellent work!

[@robinimpey101]

Fantastic explanation of the financial cost of sustainable investing. The complicating factor is that the cost of sustainable investing can be calculated, but the cost of not is less clear. As a boy from the West I would really appreciate it if you could go do a presentation for Mr. Trudeau. I think OUR portfolio could use some adjustments. 😉

[@mikemosz9418]

Ben, been watching weekly since you had less 20k followers ( not that long ago 😆) love watching your numbers climb , keep it up ! Solid insight again, always backed by research. 👊

[@BenFelixCSI]

Thanks Mike! I appreciate the support.

[@jul059]

Awesome videos. Watchout for that moiré pattern on your shirts!

[@lonzo61]

This fact based, nuanced discussion of ESG investing is so much better than most of the vids I've watched on this subject. In many of those, the comments about ESG state reductively that ESG is a scam, without really getting into the nuts and bolts that support that assertion. I've been interested in investing in ESG for years, but instead have been doing my own stock picking. And that row has been a tough one to hoe. My success has yielded me income, but it's also put me into some difficult positions. Right now, my wind and solar stocks are in the tank, and I don't know how long before they bounce back. Some may not. I know I"m missing out on profits by not investing in an S&P 500 index fund, or other mutual funds that invest in the broader market or in sectors. But I refuse to follow the crowd based on what I know is becoming of the world relative to ecosystems and climate. I cannot and will not give in to investing with the herd, while sticking my head in the sand.

[@BenFelixCSI]

More recent one: Is ESG Investing Counterproductive? kzbin.info/www/bejne/mWWkfnmfmL2Lp8k

[@lonzo61]

@@BenFelixCSI Thanks! And thanks so much for your vids and sharing your expertise with the world.

[@hemmerch]

dude i love all your videos.. Thank you

[@nachannachle2706]

Thanks a lot for this detailed overview. My personal view is that the best way to invest sustainably is to buy individual shares/stocks from sustainable companies and businesses. IPO is the way forward in this case.

[@istvanmeszaros4112]

Thx, great as always!!

[@SuperKainga]

ESG criteria investing feels as if goal posts are being shifted i.e. away from just observing intrinsic value and to a more conditional approach which may not necessarily depend on efficiency (less diversity in portfolio)..................... Thanks again Ben for the dedication on your part.

[@Phyloraptor]

Another amazing video on a super interesting subject. When I started investing, I wanted a green portfolio. Fond a "sustainable" one. Nice to see they cut tobacco and "war" for a 2,65% fees. Not what I was looking for. Glad I found Vanguard all-in-one ETFs!

[@MichaelYoungShin]

Do you mean Vanguard ESG ETFs? Vanguard has ESGV Vanguard ESG U.S. Stock ETF (0.12%) VSGX Vanguard ESG International Stock ETF (0.17%)

[@Phyloraptor]

No, I went with the straight VBAL/VGRO. Didn't bother with ESG after seeing how it did't match my expecations

[@JMise]

Interesting points. I thought that the companies dealing with tobacco, coal, oil etc. have a risk premium since they are more likely to suffer due to legal restrictions that governments may impose on them in the future.

[@BenFelixCSI]

That probably affects their expected returns too. It's challenging to separate out the effects of investor tastes from risk premiums.

[@cat-.-]

@@BenFelixCSI I was expecting you to say that the risk premiums have been priced in as price discounts, so it's compensated

[@MichaelYoungShin]

I'm pleasantly surprised to learn that a study has found that ESG investing does have social impact. Skimming the paper, it doesn't look like they established how big the impact is. I invest in ESG index funds mainly to avoid profiting from businesses that I don't like.

[@alankoslowski9473]

All my investments are with Parnassus, which is unfortunately actively managed. Their screenings are quite thorough, and fortunately the overall returns are only a little lower than the indexes. Like you I'm willing to accept slightly lower returns to feel better about how I make money.

[@thealrightgatsby1874]

@@alankoslowski9473 Trying to help my VERY socially conscious friend invest. How high are the fees with Parnassus?

[@alankoslowski9473]

@@thealrightgatsby1874 Most of them are pretty average. It varies by fund, but most are in the 0.7-0.8 range. The nominal return is very close to or in some cases slightly higher than but the indexes, but effective returns are a little lower due the higher expense ratios (index funds are typically about 0.2). However, their two highest rated funds, Equity Income and Mid-Cap, are usually less volatile than the indexes. The exception is Endeavor, which has excellent returns that beat the indexes, but it's highly volatile. Here's a good article discussing Parnassus. It's a few years old, but still mostly relevant. They're the best ESG-SRI company I know of. Again, index funds will probably produce better overall returns, but Parnassus returns are close, so IMO there isn't too much of a trade-off. www.kiplinger.com/article/investing/T041-C009-S002-parnassus-investing-with-a-conscience.html

[@MichaelYoungShin]

@Luís Andrade They're not going to be perfect, but incremental improvement is still improvement.

[@kevmitchify]

@@thealrightgatsby1874 little late, but US Vegan Climate ETF is a little lower at 0.60% and it's passive. It consists of large cap US companies screened quite stringently for animal exploitation, climate change, human rights, tobacco, and weapons. They try to keep sectors balanced by replacing excluded companies with smaller caps in the same industry that meet their criteria. The fee is kind of steep, but I think most ethically minded investors would have a hard time finding fault with their holdings.

[@zerokelvin3626]

Excellent video, thanks

[@davep3163]

Great vid as usual! Everyone should grab an ESG, ETF, it's a vote for a better world! It will drive business away from destructive industries, see it as diversification. You can also speculate with stocks like Tesla & get lucky.

[@allenc4731]

How come you always manage to release a video regarding topics I am currently pondering or conflicting about... I learned a lot from your videos, thanks Ben.

[@BenFelixCSI]

I don't know how that happens, but I am glad that they have been timely and helpful!

[@stephenmclaughlin278]

Thanks Ben, another great video! Have you ever thought about doing a video on the CFA Exam/route to being a portfolio manager. Am debating between going for my CPA or CFA and would love some perspective.

[@chrisdc2068]

Hi Ben. Great discussion on the topic of ESG. As usual its delivered in a common sense way that explains a complex topic in simple terms for investors. Speaking of complicated. Have you ever thought of taking on the topic of "Equal Weight" indexing. I have noticed a few papers about why equal weighting outperforms. Apparently there is a mathematical explanation. Or is there ? I'm betting you can explain it.

[@anthonywilson7304]

Another helpful indicator when you are researching stocks to invest in.

[@suki5353]

this was very insightful.

[@galaxytrio]

So good, Ben.

[@luisoncpp]

I remember reading some prospectuses about ESG and failing to find their criteria.

[@StanislavStratiev]

I was thinking of trying to contact you somehow to request a video on this very topic yesterday! Very exciting, will watch now.

[@BenFelixCSI]

Great!

[@JSyntax]

Ditto!

[@PapaCharlie9]

Great breakdown, Ben! Is it correct to point out that lack of a preference for ESG is not the same thing as aversion to ESG? Purposely excluding companies with high ESG scores, or overweighting companies with low ESG scores, will not necessarily capture the higher return that is the residual from having no preference from ESG?

[@simonp6339]

Correct. You could theoretically construct an anti-ESG index or ETF that excludes high ESG companies, and would probably be expected to outperform the same index with high EGS companies included, as according to sources in the video, an ESG focus is around a 1-1.5% reduction in expected annual returns. But imagine being the company that creates an index or ETF consisting mostly of tobacco, weapons, oil, gambling etc - boy, the media would have a field day!

[@fruitafval]

Very nice video indeed! I was wondering if you could make a video about the Vanguard factor ETFs for DIY factor investing. Read your article from PwL Cap, and was interested in the regressional analyses of the 5 factors in their ETFs.

[@carsonc7320]

Ben, when you buy shares of a sustainable company or any company you are almost always buying it from other stockholders, not the companies themselves. So, while you may make a teeny tiny increase in their stock price, you really aren't doing anything to "support" sustainable companies. It seems the best way to make a change is to favor actually buying products and services from sustainable companies over less sustainable companies, and leave your investments fully diversified. Thoughts?

[@MyInfotainmentFix]

Mind bending stuff.

[@mojo11jojo]

Thanks for the video. I'm just gonna buy VQET and forget about the rest

[@fragranceman3790]

So I’ve looked maybe you’ve done a video covering this already but couldn’t find it. My question is what is the benefit of having a retirement account like 401k, IRA etc. verses running an Individual investment account where I make all the stock purchases. With this being said these stocks will be held greater than a year and used for retirement. My second question would be is rebalancing my portfolio necessary? In my opinion it’s not because in my case I don’t have a set allocation for bonds and equities. I would like to hear your view about my opinion. Thank you

[@FinanceOptimum]

Good info 👍

[@philippemartin7706]

Hey Ben, do you have any videos or thoughts on segregated funds?

[@TivadarLimbacher]

Felix, great video, thanks! Different topic: what do you think of Motley Fool's Stock Advisor? They claim thay outperform the S&P 2x-6x continuously.

[@HamiltonRb]

It is a sales pitch to get you to subscribe. Warren Buffett doesn't beat the S&P by those margins, and he is the greatest investor ever.

[@shawnziv]

I think an important question is, does the decrease in expected return equal the decrease in costs from negative externalities by divesting from those companies? If EMH is true, then we should expect that the answer is yes, right? Otherwise there'd be an arbitrage opportunity where you could invest in non-ESG companies and get a comparatively lesser negative externality in exchange for the increased return

[@grf73tube]

As long as it’s a conscious investor decision, and knowing all the trade-offs involved, sustainable investing is ok. What I hate, especially in Europe, is that some brokers prevent you from investing in specific companies/ETFs because they consider them “unethical” or "risky". They treat investors like kids who don't know what they do and need to be watched over. I don’t think that happens in US or Canada (I may be wrong).

[@BenFelixCSI]

I have not seen similar activity from brokers in Canada. Interesting.

[@mathiasbierberg-vinzents442]

Great video, I am currently writing a paper on ESG investing and this is slot of great information. Just a question, if we expect more people to start ESG investing, couldn't this mean that the stocks are with high ESG score can be push up more than expected, and because of this, in reality generate a higher return than what is to be expected, because of the crowding effect?

[@_Digitalguy]

I made a similar remark to a conference speaker that was talking about the merits of ESG and showing research according to which ESG provided higher risk/adjusted return. I asked if there was a risk of creating a bubble if ESG becomes very "trendy".

[@BenFelixCSI]

This is exactly what is expected. When we say that high ESG stocks have lower expected returns, it means that their prices had to rise in the short-term. Likewise for the low ESG stocks having higher expected returns - their prices had to fall. One of the papers (I can't remember which one) addresses this as an issue that could make high ESG stocks look deceptively attractive in the short-term.

[@zdenek3010]

Crowding effect doesn't create increased return in terms of discounted future cash flow. That crowding effect will create only short term return and decrease discount rate (expected future return) of an asset.

[@stefanogreco14294]

I loved this video!! can you make some videos from an Emerging market investor point of view ... Thank you :)

[@Riley321b]

Ben, how can we find out which stocks scored the worst on ESG and are considering very "unsustainable"? I'm assuming this data is somewhere in the research you referenced. Thanks in advance!

[@kydoko]

Informative video as always, Ben. What would you say to someone who chooses not to invest at all or only in a handful of hand selected companies because of their values?

[@BenFelixCSI]

I would tell them that they are trading off expected returns and reliability for a portfolio that feels good but probably isn't having much of an impact.

[@Nughug]

Hi Ben, I am wondering what your thoughts are on investing in a single country Low expense ratio etf (like any S&P 500 etf, which usually has an expense ratio of about 0.09% or less, I.e. CSPX) vs a globally diversified portfolio which is more expensive (eg MSCI world index etf, which usually has an expense ratio of 0.2%, I.e. IWDA) and a historically poorer return over time vs S&P 500 etf Thanks!

[@mu11champione]

Hey Ben, What do you think about active management in Emerging markets such as GCC countries? and thanks for your most informative free educational material.

[@BenFelixCSI]

That's a good video topic. The answer is that it still doesn't work.

[@PapaCharlie9]

@@BenFelixCSI +1, active vs. passive management in EM is something I am interested in as well. The actives sure market the heck out of their ability to extract alpha, based on the idea that EM by definition is a less efficient market.

[@mu11champione]

@@BenFelixCSI Thanks for the reply. A video dedicated to that would be great, Ben! Actually, the most common counter argument against EMH in emerging markets from advisers is; Emerging markets are inefficient to a degree that it is wiser to invest in Active managed funds. (even stock picking is wiser "says some-professionals" in such an inefficient market if you have the right knowledge) Thanks!

[@MrWilson-zx9ix]

Yep. You definitely need to read the exclusions fine print. Even then, it is hard to eliminate a sector like coal completely. Any sort of tilt away helps.

[@alankoslowski9473]

It's actually fairly easy to avoid coal and most other energy industries, esp they aren't as profitable. But unfortunately ESG investing doesn't seem to have much affect on capital access for unsustainable companies. As Ben wrote in his blog, a more practical approach is to invest conventionally and donate and work for causes that matter to you.

[@PapaCharlie9]

Do you have a blog post or video on mortgage-backed securities? If not, it would be great to know more about them. Do they have the same unrewarded risk problem as REITs?

[@adonisds]

The best channel about investing on KZbin! Does it really make a significant difference if you avoid investing in "bad" companies? As long as you're not investing in IPOs or follow-ons, the money is not going directly to the company, so what harm are you doing? Wouldn't it be more effective to maximize your investing returns and then use part of the returns in efficient charities that do work aligned with your values?

[@4CiiD3]

If demand is high on the secondary market for ESG stocks, it would also incentivise investor to invest on the primary market in order to sell it back on the secondary market.

[@BenFelixCSI]

@adonisds I agree with you. There is the cost of capital argument which makes sense, but you would have more control over your ultimate impact by supporting causes directly.

[@danielstewart2336]

Thanks for the video, Ben. Very interesting. Did your research bring you across George Seraphim of Harvard and his work on ESG/SASB for finding Alpha?

[@BenFelixCSI]

I did not come across that. I will check it out.

[@danielstewart2336]

@@BenFelixCSI Great. Would be very interested to hear your thoughts on it in light of what you found in this video.

[@m136dalie]

Great explanation. The video hints to this but if an investor were to exclude all companies which do things they deem morally wrong, they would essentially be unable to invest in ANY large company. Carbon emissions, land clearing, unethical labour practices, tax evasion, pollution etc... Pretty much every listing on the S&P 500 is guilty of at least one of these. My opinion is that business regulation is the responsibility of governments and international organisations, not individual consumers and investors.

[@porteauloin]

very clear, very good! Can you talk about more international topic. For example N26! I am curious to know your point of view on it :)

[@gpower000]

Hi Ben, great video. One thing I took away from your video is that the rise of sustainable investing has increased the borrowing costs of low EGS score companies, presumably through the mechanism of a reduced stock price. This implies that low EGS score companies more likely meet a value criteria. Does this means a value investing portfolio will tend to include more low-EGS score companies, effectively trading against investors doing sustainable investing?

[@zvxcvxcz]

Interesting question. I'm not sure of the answer, but there certainly are ESG ETFs targeting small cap value stocks or value stocks in general, so there are definitely options to avoid being heavy on low ESG companies in a value based portfolio.

[@Jasta85]

I just keep it simple and go for a total stock market index fund, international index fund and a solid bond index fund. When sustainable companies become more prevalent in the future my money will automatically shift into them as they take up a larger share of the market.

[@gerben4966]

Awesome video Ben! In my country (The Netherlands) we strangely have an opposite situation for costs. We only have ESG screened index funds, there even are no non ESG screened index funds! :) We can buy non screened index funds from other European countries. But that makes them less tax efficient which results in about 0.30% extra costs per year. Our screened index funds typically exclude 4-8% of the market cap weight of the MSCI world index. Returns have been 0.20 - 0.30% better per year for them for the last 6-10 years. But I understand from your video that that might be different in the future. Al screened funds don’t reflect my views and values fully btw. A cost difference of 30 basis points is quite substantial. Although they don’t reflect my values I’m still tempting to go for them to lower my costs. What is your view on this? Thanks!

[@riffrff]

Am I the only one not seeing the automatic subtitles option for this video? As a non-native english speaker it was useful, but I don't see the "CC" icon anymore. Great video as always anyway, thanks!

[@JSyntax]

Bravo, thank you for covering this emerging topic! It sounds that sustainable investors need more tools to better assess the value criteria.

[@bgomers7]

i smell an opportunity

[@jonpaton4449]

Just what I was looking for, sign me up for negative ESG

[@alankoslowski9473]

A better approach would be focus on stock with higher expected returns *regardless* of ESG characteristics. An expensive stock with a high P:E is a bad investment regardless of ESG characteristics.

[@alexfloyd5730]

I see nothing wrong with just investing in broad index and then do your own "socially conscious investing" with the resulting money by buying products from companies you support and avoiding companies you don't support. Go with the market for investing, go with your conscious for consumption. I feel like the line only really starts to blur if you have so much money that most of your social impact comes from your capital, in which case, I don't know, start a charity?

[@BenFelixCSI]

This is the rational solution to the problem.

[@RK-bj8ho]

Both of you are missing the point ........ it about FEELING personal responsibility. If someone can choose to CONSUME consciously, then they can choose to INVEST consciously also. This product exist to cater to a demand, just like Islamic finance, vegan food, conflict free diamonds etc. Any inefficiency premium costs is made up for by personal sastifaction (more important for certain people)

[@FreekHoekstra]

Ben Felix if this is true, then why is Blackrock for example choosing to go in this direction? The argument does appear to atleast be that very non sustainable stocks like oil, and coal have an expiration date, and divesting from that is a good long term investment strategy?

[@bgomers7]

​@@FreekHoekstra normal broad index funds will eventually sell out of fossil fuels anyway because large fund managers and institutions will no longer invest as much into them, lowering their percentage within the index fund. personally I have allocated a certain small percentage of my portfolio to go into lower fossil fuel funds like SPYX and CRBN from ishares because I don't mind sacrificing a few dollars in returns to do my small part in lowering carbon emissions. iShares even gives a carbon intensity score to their esg funds, Tons CO2E/$M SALES. not saying i have better portfolio management skills than the next novice investor, but its similar to the same reasons i eat less meat, drive a prius, try to consume less overall etc. honestly its more to help myself sleep at night.

[@alankoslowski9473]

But as Ben notes in the vid, ESG investing does successfully pressure companies to be more ethical, so you're better off with both ESG investing _and_ patronizing ethical companies.

[@Ritze007]

Interesting arguments and study results. I was wondering how the recent outperformance of the MSCI World SRI against the MSCI World, even after cost, could fit into that argumentation? Also, my personal hypothesis is that we will require more "E" focussed industries, especially in the energy sector. Those will inevitably experience high growth and potentially outperform the market, due to the shift in focus. How would that logic agree or disagree with the arguments you presented?

[@drmsgp]

so what do you think of UC44. it has outperformed Global Large-Cap Blend Equity and MSCI ACWI NR USD

[@kman2324]

Yes, ESG funds do vary and don't agree what should and shouldn't be included but that isn't a big deal. I think for most people that make that complaint (not necessarily Ben, I don't know his personal feelings) it's a BS argument. We see a wide variety for every classification that exists. Why does Vanguards midcap ETF have tons of large cap companies? What's high yield? What's an American fund (US listed or US company or US started)? What's an emerging market? What's a developed market? What companies count as AI focused? These are all vague and vary by provider. Yet nobody is clamoring to clarify those terms. Only when it comes to ESG do we see hysteria and I think it's because many people see ESG as a threat. For decades the left in US (and I know Ben in Canadian) plowed money into Wall Street with little thought to where the money was going and what it was doing. Now the left are finally realizing what their money is being used for. Finally they realize the power that their money brings and ESG is just the first structural reform many younger and/or liberal investors are demanding.

[@iandunn206]

Even if an SRI fund doesn't match my values 100%, it still matches them a lot more than a fund that includes destructive companies. We also don't have to invest 100% of our portfolios in SRI funds, even 5% is a significant step in the right direction.

[@alankoslowski9473]

Exactly. Better ESG funds perform *nearly as well* as index funds so to me it's a reasonable trade-off. I'm willing to sacrifice some returns to encourage more sustainable business practices and to avoid holding companies I despise like PMI.

[@marcrichard5359]

Hi Ben, I think this is a great conversation to be having but I believe it's deeper than what you've explained in the video. Specifically regarding your logical conclusion after the explanation of the Pastor, Stambaugh and Taylor study: Concluding that expected returns "must be lower" if it's actually driving social change. I believe there is an intuitive counter argument to this and you've missed a step in your logical process. Many of the issues that ESG integration attempts to address are tied to underlying risk. These include resource dependency and supply chains, governance and policy related to good behaviour at the highest level. I believe these factors and information have been overlooked in the past; probably because in the short term, these don't have much risk, and certainly SRIs or negative screening funds don't address them. Long term, though, and these can mean reducing the likelihood of scandals such as in the case of Volkswagen, or critical impacts to supply chain that could leave a company high and dry. Thus the tail end risks may be fatter for non-ESG companies.

[@BenFelixCSI]

Thanks. I disagree that this counter argument is intuitive - it is an argument that is based *explicitly* on the market being inefficient. Show me the evidence of systematic market inefficiency and I will agree that the argument is intuitive :) Tim Nash and I discussed this here kzbin.info/www/bejne/kJCch62DZZKWrKM

[@CollinLi]

Does this mean if you are ruthlessly in pursuit of returns, you should filter out ESG stocks?

[@jubayerahmed337]

Good vidio 🥰🥰🥰

[@thenon-gaapbillionaire3306]

What is this "expected return" you talk of. Is it based on book value and pe ratio and earnings growth?

[@BenFelixCSI]

Expected return is what you expect to earn in exchange for taking on the risk of owning an asset. E/P is one approach to measuring expected returns/ risk premiums.

[@LiveLoveLaughLola11]

Ben, seems like your employer disagrees? From their page on responsible investing: “Our [PWL] analysis…has led us to the conclusion that an ESG portfolio will likely have a similar risk-return profile as a non-ESG portfolio. These findings contrast with earlier research that supported a widely held belief that responsible investing came at a price in terms of foregone returns. This theory held that premium returns were provided by so-called sin stocks such as tobacco, alcohol and gambling. Sin stocks were thought to outperform precisely because they were shunned by many institutional investors and could be had at lower prices, even though they were often highly profitable. Subsequent research disproved the theory that sin stocks produced better returns than other stocks. What’s more, recent studies have found that companies with strong ESG practices generate better financial performance than their peers. BlackRock, MSCI and Dimensional Fund Advisors all have data to show the outperformance of ESG funds compared to their own non-ESG-focused offerings.”

[@ciaranburks4638]

Hi Ben thanks for all the good content man, love this channel and the RR too! I saw that the CFA institute brought out a certificate on ESG, which could be interesting.

[@BenFelixCSI]

Thank you!

[@MRZEROTOINFINITY]

Great tip about fees 👍 Always have to keep them in mind. A lot of people don’t remember about the costs associated with ETF’s and short-term investing. Keep those higher costs to a minimum. Hopefully everyone is growing their money to infinity! 📈 individual growth stocks help me achieve wealth building 👍 A couple dividend stocks are great as well!

[@TweedeJuan]

Ben, I always had this idea that investing is, apart from herd behaviour and the related momentum factor, a zero-sum game. If you don't take the earnings from the publicly listed companies, someone else will. Of course, for short term gains and also when it comes to acquisitions this fails to be true, but in the long run and in an efficient market one expects the price of a company to correlate with its expected earnings. From this point of view investing in ESG makes no sense if it does not yield higher expected results, unless you expect activist shareholders or board renumeration policies to push for ESG ratings in order to push up stock prices (which is a bit ironic since this would not be much in line with good governance I would say). What is your take on this?

[@alankoslowski9473]

My investments are with Parnassus, which does actively advocate for ESG shareholder interests.

[@ethanmiller2042]

Hey Ben, I am from Australia and love your videos but obviously some topics such as the TFSA and RRSP accounts are irrelevant to me. Do you know of any KZbin channels similar to yourself that would be specifically for investing in Australia? I am curious to see the similarities and differences in our systems and how I can best utilise them.

[@BenFelixCSI]

Thanks Ethan. Unfortunately I do not know any Australian KZbin channels similar to mine. I can tell you that the RRSP is somewhat similar to superannuation.

[@ethanmiller2042]

Thanks @@BenFelixCSI. I am fairly on top of my super in terms of growth/income allocations and am about to start investing in an ETF portfolio since watching your channel.

[@karstenszajner6043]

Would you consider ESG/SRI investing to have a firmer grasp of the long term implications of how society will change as we try to battle climate change? I don't see how non-sustainable companies can continue high returns if we are trying to avoid the use of their products (such as oil and gas) within the next couple decades.

[@alankoslowski9473]

That's probably somewhat accurate, but as the market-share of non-sustainable industries and companies decreases index funds will concurrently decrease those holdings. For instance, if you look at companies that compose small and mid-cap indexes there are few petroleum companies since these tend to be larger companies. Even though small and mid cap indexes aren't specifically ESG by design, most of the companies are fairly sustainable. Though this doesn't seem to have happened with large indexes it might in the future. Hopefully as the economy moves away from petroleum large cap indexes will reduce those holdings. I'm an ESG investor, but I understand and accept the risks relative to more diversified index funds. By spreading out the risk among more companies index funds are able to minimize risk that less diversified ESG funds are susceptible to. I'm willing to accept this as a cost of encouraging sustainability.

[@fragranceman3790]

Great video like always. I would love to get your opinion on your recommendation on how to invest during this “all time high market “. Or what would be the best course of action to take as far as assist allocation.

[@BenFelixCSI]

Does Market Timing Ever Work? kzbin.info/www/bejne/rZDEgHiIorqKmqM Preparing for the Recession kzbin.info/www/bejne/l6HRfmCva9iLjKM

[@fragranceman3790]

Ty

[@Shadowdoctor117]

Moral investing is always an interesting thing to ponder about. Especially when things are not black and white. Take microsoft for example. They are planning to go carbon negative. Amazing right? Well if you look at Microsoft from a privacy perspective windows 10 and the rest of their software tracks a lot of what you do. It can be said similar things with google or facebook. So really it is hard to just say that one company is an "ethical" one when what determines ethical is so broad.

[@denniss3980]

Keith Santamaria it is only moral until some SJW calls it immoral

[@alankoslowski9473]

Good point Keith. For instance I'm pretty distressed one of my ESG funds recently bought Amazon, which I consider unethical for the way they treat their employees (though I understand they try to be environmental responsible). While ESG is relative, I don't think most of us ESG investors are so deluded to believe these companies are entirely ethical, but we want companies that are mostly ethical or working to be more so.

[@m.morininvestor9920]

I have ICLN and it's been green the whole time.

[@utmax8522]

What are your thoughts on copycat investing? I.e. copying investments from an index or mutual fund to avoid the fees.

[@bgomers7]

I think he would say it would cost more in time than the money you would save in the ~.016% expense ratio unless you had a really massive portfolio and your time is not worth as much to pour over spreadsheets, unless you were able to automate it somehow

[@elmateo77]

I have a significant portion of my portfolio invested in renewable energy companies and technology (etfs), not because I especially care about the environment but because I think this industry will grow substantially faster than the overall market in the next 30 years.

[@nachannachle2706]

Good point. Also, don't forget Water, the most contentious resources of the 21st century.

[@d1g4s]

Hi Ben. Started watching your videos recently and I think they're very informative and of great quality! I think they would get even better if you'd show your image from the waist above. Showing and using your arms would increase your non verbal abilities, which is also a very important focus for people watching. It would make you more dynamic in the videos. Just a quick thought I had, hope it's useful for you!

[@BenFelixCSI]

Thanks. We are working on a better studio that will allow this. The current studio is too small to zoom out any more.

[@luisluiscunha]

Could it be that MSCI USA SRI better returns than plain MSCI USA is because the 150-ish companies selected from the 600+ of the broader index have better quality?

[@pranavananda7]

ESG is part of a package, including restrictive financing for a low or no rating. The higher costs associated with a higher ESG rating will be pased on to consumers making our lives more costly.

[@dm-st1xt]

Very useful! This is helping me a lot to come up with ideas for my MSc thesis :D

[@aaronlojewski6819]

Hi Ben. I would love to hear your thoughts on Avantis Investors, it seems that some of the DFA guys broke off to create it and they have a US Small Cap Value Fund and an International Small Cap Value Fund that looks very interesting for American investors. It appears they are using acidemic research (Fama) and implementing several of the factor strategies that you have gone over in your videos at a very reasonable expense rate.

[@BenFelixCSI]

Their pitch is great and the products look good on paper. The hard part with small cap value is supposed to be implementation. Dimensional has a 38 year track record. It will take a bit of time before we know whether or not Avantis is delivering their pitch. If they deliver, I'll be a fan.

[@zvxcvxcz]

Are the lower returns driven by poor performance of the portfolio or by the typically higher fees? Some more recent ones seem to have quite reasonable fees, e.g. XVV fees are just 0.08%, which is actually lower than SPY (which is at 0.09%). Of course XVV didn't exist until a few months after you made this video though. While getting alignment with more fine grained values is pretty much impossible... that's true of all ETFs and mutual funds, not just ESG ones... and at least the ESG ones get part of the way there for me.

[@Samstar_]

I appreciate how researched, thorough, fair and well-rounded your videos are, Ben. RI & ESG is such a broad term... For example, Amazon is technically ESG-compliant because it offloads all services.

[@MrDivad006]

Can you make a video on MSCI World vs S&P500 (why choose one over the other when trying to choose an index fund/ETF)?

[@BenFelixCSI]

Done kzbin.info/www/bejne/iIOalmSPYq19rrM

[@MrDivad006]

@@BenFelixCSI Really nice video. So the conclusion is to invest in the total stock market through a globally diversified portfolio of total stock market index funds. Do you have suggestions on what indices one could use as a substitute for the S&P500? What indices would you use to build a "globally diversified portfolio of total stock market index funds"?

[@mbuckley2000]

Hi Ben, how can ESG index funds have a positive social impact when they have little effect on the prices of the underlying stocks? This is based on the idea that stock prices are set by volume of trading, which is comparatively low for index funds (from your index fund bubble video)

[@BenFelixCSI]

If a large portion of investors don’t want to own stock in a certain type of company, it will be harder for that company to raise capital. This should affect the price.

[@mbuckley2000]

@@BenFelixCSI Makes sense! Thanks for taking the time to respond

[@mariamiaanna]

Blackrock manages over 7 trillion$ in assets, do you think Blackrock made that decision because they are "good"? Also I think you should be talking about Risk-Adjusted expected returns...On another note you said ESG rating is not really reliable, so correlating returns with something that is so generic and vague doesn't make sense to me. ESG integration is essentially part of your good fundamental analysis and risk management and should be done sector by sector. SASB (Sustainability accounting Standards board) found a positive correlation between financial returns and material non-financial factors and they don't look at "good" or "evil". Great presentation skills and video editing skills though, do continue exploring this subject.

[@BenFelixCSI]

I think that BlackRock is appealing to the current public discourse. All of these studies talk about risk adjusted returns through the lens of multi factor asset pricing models. I also said that "I think that we have established that investors should expect lower risk adjusted returns from a sustainable portfolio." I have not seen SASB's study, but other similar studies that I have seen do not control for risk factor exposure, or ignore the difference between a short-term price increase driven by a declining cost of capital and long-term expected returns. A falling cost of capital looks great for a bit (rising price), but it incrementally decreases expected returns.

[@outrightmed]

I bet people will go looking for an ETF with lower ESG scores for the higher expected returns.

[@BenFelixCSI]

This is what has happened in the past with "sin" industries.

[@chriscanon8829]

Do you have a video comparing starting a small business vs investing in index funds?

[@BenFelixCSI]

I do not. Those would be a bit challenging to compare.

[@robertbrawley5048]

Sounds equally risky . But the small business if successful would return far more than any ETF. I would think. Yet starting a small business could equate to a total loss while the ETF not likely. I would think.

[@alanvazquez7598]

Hi Ben, great video, some points I'd like to mention. The academic papers you mentioned might have a point based on his research about lower E(r) for higher ESG criteria companies in the past years, however, they have a huge out-of-sample error given that ESG index (in the US) have delivered stunning returns against the market (S&P500 Index). Some data: iShares SUAS US EQUITY: 102.81% ; Expense Ratio: 20pb SPDR SPY US EQUITY: 68.68% ; Expense Ratio: 9.45pb *07/12/2016 - 11/16/2020 *Data from BBG The outperformance is notorious. A Joe Biden presidency means a political agenda more focused about ESG than the previous 4 years of Donald Trump. Would you recommend ESG index funds for a retail account? Do you agree with the papers you mentioned about lower Expected returns for companies with High ESG criteria? It would be great know your opinions

[@alankoslowski9473]

Parnassus is the only company I know of with a long-term track record comparable to the index. The ones you mention don't have much long-term history. Unfortunately Parnassus is actively managed. While I generally agree that active management should be avoided, since Parnassus has the best long-term ESG returns, they're probably the best option.

[@krystalenevoldsen2214]

Hi Ben! Upon researching how to make my very first investment in the stock market, you were the top recommendation! After watching several of your videos it's clear I'm like a caveman sent to the future. You seem incredibly trustworthy so I'm about to ask what seems is going to be a very embarrassing question in the stock market world and I can only hope it's worth your time to comment... I guess put short, if you were a mother/animal rescuer (to show you why I only have the amount mentioned next) with literally $100 in her pocket to spare right in the middle of the Coronavirus crisis, where would you start?

[@BenFelixCSI]

It depends. If you already 6 months of living expenses saved up in safe liquid cash/ high interest (well, not so high today) savings accounts as an emergency fund, and you have enough savings put away to meet your short-term goals, then I would look at the Vanguard or iShares asset allocation ETFs. If that sounded like a foreign language then I would go an look at something like Wealthsimple.

[@krystalenevoldsen2214]

Ben Felix thank you so much for responding! I will definitely look into all of those.

[@rileydesrochers1643]

So does that mean that if you invested in only companies with low ESG scores you could beat the market?

[@BenFelixCSI]

Yes, that is possible,

[@Mazufa]

@Ben Felix Could you add auto-captioning to your video here? :) I am Finnish and I do not really part of the English language very well, so the automatic Finnish language texts would help to understand what you tell in this video! :) I used a google compiler to write this post.

[@panisoniclauzon]

Thank Ben for such a topical video! Quick question: you mentioned that sustainable investing can be expected to provide lower risk adjusted returns. I wonder what kinds of risks are accounted for in this 'risk adjusting'? Is regulation risk and susceptibility to climate change accounted for, as these two seem to be considerable risks to many non-ESG companies out there?

[@BenFelixCSI]

When we say risk adjusted we are adjusting for known systematic risks in the stock market, including the risk of the overall market, the risk of smaller stocks, the risk of value stocks etc.

[@89loal68]

A comparison between SWDA and SUSW contradicts what you said.