Talking SRI with TSA Agents

Values-Aligned Investing
September 27, 2018

In the rural part of New Hampshire where I live, the local airport can have as many TSA agents running the security checkpoint as there are actual passengers. The little Cessna I take down to Boston has only nine seats. That means the security line is never long, and the conversation with the TSA agents can be leisurely and friendly.

As I headed out to Sausalito recently to start my new job with Aperio Group, one of the woman agents asked me what kind of work I do. “Investment research,” I replied.

“Oh, what kind of research?” she followed up.

“The socially responsible kind,” I explained.

There was a pregnant pause and then she and the male agent next to her broke out laughing.

“All these years doing SRI,” I muttered to myself, “and some people still think what I do for a living is a joke!”

Mind you, as an ESG strategist, I take my line of work very seriously. Note that I use the term “ESG”—which stands for “environmental, social, and governance”—because I don’t want to imply that people who aren’t embracing socially responsible investing (SRI) are somehow being “irresponsible” with their money.

In fact, that distinction is part of what attracted me to working with Aperio Group. This firm has astutely redefined the SRI term as “Socially Responsive Indexing”—customizing strategies that matter most to its clients.

ESG, on the other hand, is a broader, value-neutral term. To me, it says that information is being taken into account that traditional financial analysis typically leaves out. Sometimes, this is referred to as “extra-financial factors,” as if they have no intrinsic value. But that label also doesn’t sit quite right with me, since I know from experience how companies’ treatment of the environment, workers, communities, and other stakeholders can have a profound effect on shareholder value. In any event, ESG is meant as a complement to SRI, not a replacement for it.

So if I have a little more time to share my views on ESG with my TSA friends, here are five points I would make in hopes of getting them to take my job a little more seriously.

  1. SRI investing is about matching your portfolio with your values. If you object to a company’s products or practices, you don’t have to support them by investing in it!
  2. ESG investing is about placing a value on things the stock market may discount or overlook. As issues like climate change and gender equality play a greater role in our lives, you may want to lean into companies and sectors that are acting on such long-term trends, and tilt away from those that are falling behind or are out of touch with changing social and environmental norms.
  3. Employing either strategy does not mean you are going to outperform or underperform the market. While more exclusions and tilts increase tracking error, optimization tools often can reduce tracking error to within a few hundred basis points of the benchmark in a broad portfolio.*
  4. If you really want to get serious about effecting change, think about putting your shares to work in proxy voting and sponsorship of shareholder resolutions on issues you care most about. Like or hate the voting process, good company boards know that proxy voting and shareholder engagement serve as an early warning system on issues they know they need to address.
  5. Finally, if you pay taxes, you can combine SRI screens, tilts, and engagement with tax optimization so that your portfolio is maximizing its potential for double-bottom-line results— targeting enhanced results for you and positive impacts on the world you want to live in.

The next time I am flying out of Lebanon, maybe I’ll hope for a flight delay that’s just long enough to turn the TSA agents’ laughs into nodding grins of appreciation for the kind of work we do here at Aperio.

But I suspect they’ll still ask me to take off my shoes!

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*See “A Guide to ESG Portfolio Construction” and “Optimizing Environmental, Social, and Governance Factors in Portfolio Construction—An Analysis of Three ESG-tilted Strategies.”

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