Ep 63: Making Your Ownership Count

We are into our Sustainable Investment series and how to make an impact with your wealth.

Today we are going to specifically talk about how you are an owner and how do you make an impact within your portfolio.

What are some cool things as an owner, what does your vote really count for, how do you make income, and how do you know that you haven't delegated something that you aren't even aware of?

What are those elements of checks and balances that you need to understand as an owner or an investor in this space.

So if you're curious about this topic, continue to listen. And if you know someone that might also be interested in this topic, well share it, we would love to have increased listeners and access to the free educational tools that we offer.

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Securities offered through LPL Financial, a member of FINRA/SIPC. Advisory services offered through Advisors' Pride, a SEC registered investment advisor. LPL Financial, Advisors' Pride, Forethought Planning and the guests of Thrive For[e]ward podcast are separate and unaffiliated parties. Lisa Harris and Lisa Harris & Co are not affiliated with Forethought Planning, Advisor's Pride, or LPL Financial. The views expressed here are those of the participants, and not those of Forethought Planning, Advisor's Pride, or LPL financial. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. LPL Financial and Forethought Planning do not offer legal services.   

Transcript

Shannon Foreman  0:00  
Hello friends welcome to the Thrive Forward podcast we are into our sustainable investment series and how do you make impact with your wealth? Today we are going to actually specifically talk about how you are an owner, whether you are an owner in a stock or a bond, and how do you make that impact within your portfolio? What are some cool things? as an owner? What is your vote really count for? How do you make that income? How do you know that you haven't delegated something that you aren't even aware of? And when you are the debtor or owner of the bond? How do you make sure that it's actually doing what you want to do, and what you're invested on, while also providing you a rate of return? What are those elements of checks and balances that you need to understand as an owner or an investor in this space, these are two topics that we don't really talk about when it comes to sustainable investing. But I actually think they're probably the coolest parts of sustainable investing, because it involves accountability to our Investment Partners, the companies that we are invested in. And accountability isn't a bad thing. It's not big brother watching over you. It's just the element of us truly as investors understanding where our dollars are going. So if you're curious about this topics, hit play, and continue to listen. And if you think of anybody else that might also be interested in this topic. Well share it, we would love to have the increased listeners and access to our free educational tools that you have. So thanks for listening.

Shannon Foreman  1:42  
What is the definition of sustainability? We're talking this entire month about sustainable investing in what does that mean? That it would be great for us to start today's episode with just the definition of what is sustainability? sustainability is the capacity to endure in a relatively ongoing way across various domains of life. So in short part, the ability to maintain a certain level or rate not in this case rate of return just a certain like, where are we are we able to sustain the same space that we're in? A lot of times, we think about this in terms of our environment. So we think about are we able to sustain living the way we are living and still have a planet to live on. So today, I wanted to talk about two different parts of investing sustainably that we don't always talk about. One is going to be on the fixed income side, or the bond side of things, which has a tendency to be in a portfolio. I wouldn't say necessarily the safe, but the absorbable absorbent area of risk. It's like that steady Eddy, it's not going to be that high rate return, like equities, but that's bond portion of your portfolio or sometimes referred to as fixed income. We're gonna talk about, excuse me, we're going to talk about that in comparison to sustainable investing. And we're also going to talk about how do we hold companies accountable through something that's called a proxy voting, those two pieces of sustainable investing, I actually think are part of the coolest part. And we don't talk about them that much. So I thought we'd break them down today. So let's just start with what is a bond? Right? In the simplest terms, it's a debt instrument. So a stock provides you ownership in a company. And a bond is essentially that company owes you you're lending that company or community, if it's a municipal bond, that organization that you are invested in,

Unknown Speaker  3:51  
owes you, buddy. So it has a tendency

Shannon Foreman  3:55  
of being like, I'm going to pay you back at this certain rate for a period of time. And if the market fluctuates, or my project fluctuates, or our company fluctuates, it might dip down from a value perspective, but you're always going to earn this quote unquote, interest rate that you're going to do. It's a little bit more of that steady Eddy rather the risk of the growth aspect of who's investing and how is that company growing? And what is what is that element, right? That's that kind of like rollercoaster ride of the equity side, whereas like I said, bonds are kind of the steady Eddy, what does it mean to have bonds in a ESG, or sustainable investment strategy? So I want to just back up what I talked a little bit about municipal bonds. municipal bonds are bonds that we put, a lot of times have preferential tax treatment depending on your situation, as well as what bonds you are purchasing, whether they're in your state or if they're, you know, a federal or a national type of situation, that you're in. Investing in, there are different tax treatments, but usually some favorable tax aspects to municipal bonds ESG investing isn't going to necessarily have that same element to it. However, very similarly, they're going to be invested in what is the progress of a project that we're making, you know, with a municipal bond, it could be an elementary school, it could be a park, it could be a airline, it could be hospital, it could be a football stadium, it could be lots of different things where that money is being used to provide some sort of resource for that community, might be roads, it might be all different types of things that could be situated in that municipal bomb. And oftentimes, when I start to talk about sustainable investing in the what we again call fixed income or bond portion, I compare the two now, I will be full disclosure, this ESG bond scenario does not have the same potential tax implications or ability to give you tax,

Shannon Foreman  6:03  
special tax treatment, that's not what ends up happening in those areas. However, there are some cool things that do end up happening within impact based investing or bonds, or investing in communities. So something that happened in 2008, is we hit a housing crisis, right, there were a lot of people who bought houses that they couldn't afford. And that got really worrisome because all of these people started foreclosing on their homes. And what add added to that was people were investing in those mortgages are called collateralized mortgage obligation bonds. The reality is in 2008, we had no security, so somebody foreclosed on their loan, that meant that investment also basically went to zero, right? So tons of people lost their money if they were tied to this in the market. And then banks and regulators came out and said, No more, we're not doing that it's going to be we're going to put some ropes and red tape and lines around people being able to qualify. So if you go to buy a house, now, the likelihood of you getting approved for 100% of the value of your home to lend on or to borrow from a bank is pretty slim to none. In fact, they're not supposed to do that. Some banks and financial institutions do put a little bit more risk on it and will go up to 90% of the value of your house. Most solid, big financial institutions, if you're going to go 80% or higher, are usually going to charge you a teensy bit higher an interest rate to do that, which is why that common element of I mean, 20% down to buy a house is you don't actually need that. But that helps you to have the equity portion in your home. Why am I talking about all of this? You say? Well, if it relates to each other, we now have those elements of if you bought a house, and let's say the market went down, because I know that that's a big concern for a lot of individuals with what this quote unquote housing bubble looks like. It's not really a housing bubble. It's more that there is a lack of supply and an increased demand, right. And so that increased demand is driving those prices up, which is in turn, maybe not putting people in the most financially stable position. That doesn't mean that they're over valuing what they're borrowing. So I just want to clarify those two things. So we have all this red tape, right? You can't go into a mortgage situation or have what's called a collateralized mortgage obligation bond. Now, because there's mortgage insurance that you have on it, if you were to foreclose on it, there is Freddie Mae and Freddie Mac, because they will step in, and we will absorb this loan if somebody were to foreclose on it, right. So there isn't as much risk as we used to have in sustainable investing. We see institutions coming in and saying, you know what, we really don't want that person to lose their home. How can we step in? Freddie Mae, Fannie Mack, can we secure the loan for them to actually be able to afford whatever it might be if I was a Job Change health situation, that they're not able to afford this house anymore? How are we able to make that happen for them, so that we don't have a turnover? There are direct impacts to someone being foreclosed on, that can result in them not having a place to live, which means that they are homeless, which is a stir up, or is a surge crazy of a tornado that could end up really impacting their future, not just financially, but in so many other aspects of their life, because, as I commonly say, money touches every aspect of our lives. So in impacting esteem, we actually go into these scenarios where someone might not be able to afford that house anymore. And we secure that mortgage for them in order to make sure that they can afford it. So something very differently, you're not taking a bet on that mortgage, you're actually repairing it, and making sure that something good can happen for that community. And we have homeownership. And we know homeownership allows for other individuals to be able to provide generational wealth or grow equity in something that they own. So it's creating that solid entity of different things, in order to be able to bring two people together in a space. That makes sense. And particularly in this example, I'm giving you it's on the housing spectrum. There are a lot of other focuses just like many other aspects of the fixed income space now, where they're going to have different focuses and potentially like on the environment, there could be a specific what some people refer to as green bond, where they're looking at wind energy, and they're going out, and they're specifically investing in companies and giving companies money to expand these resources in a in a space, right, there is a purpose behind every single type of investment strategy in that space. Much like any type of bond out there in the market, if it's an ESG based bond, or a sustainable investment type of bond, you're going to see different ratings on investment grade bonds are bonds that have been evaluated in a space where again, safe isn't necessarily a word that we want to use in our industry, because you're always going to take a bet on something when you are investing, but it's going to be a more stable, reliable financial institution. So you always want to make sure whenever you're looking at any type of fixed income, that you have investment grade bonds associated with that. And those are questions that you absolutely can ask your financial professional and do not ever be afraid to ask those types of questions. I think that it's important for us to advocate for ourselves, and be able to understand that as well. So when we start to look at like, for instance, we partner with nuveen, and Tia, on the fixed income side within our portfolios, we have a bond that focuses specifically on strategic allocation within direct and measurable impacts within Affordable Housing, Community and Economic Development and renewable rent and natural resources. That's that that's that bond has that focus, what impacts are they making those specific places, and everyone has access to being able to have a perspective for every single one of your investments. Now, you might not want to read it. But a prospectus is actually what's going to tell you what's specifically happening within that management, what are they looking for? How are they making those decisions. And that's not just with sustainable investing. That's with any type of investing. But sustainable fixed income investing, again, just takes that topic, or something that's important, like that housing situation that I gave you an example for, and look specifically at those spaces of impact in the organizations that they are supporting, or that you are investing in. So now let's switch gears kind of to an opposite space. But this is on the equity side of things, or when you own a stock. And when you're in a mutual fund, what ends up happening is you are an owner of many different stocks and you will get sent or given this element of you know, what do you want to be able to vote on your own behalf or you don't want your broker dealer or your advisor to do it, you actually sign that and sometimes probably have no idea that you sign it in all reality, but it's called proxy voting. And so let's say you own x company, and x company is bringing something to the table for their shareholders to vote on. Because as owners in the company, you get a say about what happens in that company. That proxy vote is basically you give me that right to someone else to vote on your behalf or you voting for yourself. And what ends up happening if you give it your proxy vote up to an investment company that might not have a sustainable focus, they're not going to challenge in those areas that are important to you. Those causes that might be important to you. But if you partner with a specific sustainable, Sri ESG, all of the things that we've talked about the different approaches and names that sustainable investing comes at. When you partner with someone like that they're actually keeping track of how they are necessarily challenged, but partnering with those companies calling in those companies to be able to support some of the elements of environmental, social change and government. So for instance, within some of the companies that we partner with, they keep a tally of when they've contacted certain companies on what. So let's take a topic of pay equity into situation, there is an opportunity for these different companies to then when you say, let's say they're voting on some sort of element, when it comes to compensation, your proxy vote has a say, and you can say, you know what, from a financial standpoint, with these types of financials, I would expect XYZ, I want an understand that every female or every female identifying individual has equal pay, and that we're not discriminating against anyone by their gender, color of their skin, sexual orientation, ability, or disability, all of those things you can question when you go into your proxy vote. Now, I'll be very honest with you, not everybody, and not every company is going to listen to you, right. And if you were hurt an individual coming in, it's probably going to be very unlikely. But when you have the backing of a sustainable investment firm, who has lots of views, right, that they are supporting and acting upon, they might listen a little bit more, it might take a couple of strides to be able to get to that space. But the first step for some of the financial organizations that we partner with impacts as one of them, we will be able to hear from one of our partners over at impacts later on in our series on sustainable investing. The first step for them is outreach, just simply like, Hey, what are your policies on this? How are we being able to do that, the next step is dialogue, maybe we actually get an agenda item on maybe we're able to talk about that at a board meeting or, you know, in one of these sessions, and then from there, it's progress, and milestones, and it's going to be something that doesn't happen overnight. So when I explain to clients a lot that impact investing, or sustainable investing, does maybe align with the things that are important to them, it doesn't mean that we're going to have rocket science change overnight in any of these aspects, right? It is still gonna take progress in time. But it's a way for us to make progress in time in a mass way, right? Because again, going back to that one individual, if you're going to try to take your one proxy vote versus that investment firm that has hundreds of 1000s, potentially of proxy votes, who are they going to listen to more? Right? There's power in numbers. And so that's why thinking about your proxy vote as not just something that you delegate to somebody else, but whoever you delegate to aligns with the things that are important to you, in your life. And I will say this, if you partner with a really great company, there's transparency behind things. So for instance, with impacts, they produce a report, every I believe it at minimum annually, but I think, quarterly, they might have updates to this to at a minimum on an annual basis. They're literally going through the companies that are a part of their portfolios and telling you, what are the conversations that we've had? What is the outreach been? What have some of these dialogues been? Has there been any progress? Have we created any milestones with them? What are the wins? Where are the areas of opportunities, there's transparency, in an industry where it feels like there is very little transparency in that proxy voting aspect of things, all of a sudden, now, there is transparency, now you have the access to being able to see the things and the partnerships and the things that they're doing to be able to really create the change. So sometimes I hear well, it's just a band aid to put your investments in sustainable investing. Well, we can either say it's a band aid, or we can say that there's progress making every single day. So you can look at one thing or another, but I wanted to be able to share with you today, two other interesting types of aspects of sustainable investing that don't always get the limelight, right. We talked about the overarching big stuff when it comes to senior will investing. But we don't necessarily talk about the super cool parts. So again, proxy voting is exercising your shareholder vote and aligning yourself with a company that if you're going to give up your own voting rights, no, what are the things that are important to you and have that transparency of reporting. On the flip side, the fixed income side, you always want to make sure just like any other aspect of society, Investing, you're dealing with investment grade bonds. And you're looking at it from a perspective of what are the specific causes that we are invested in? How are the dollars that are being given through this debt instrument to these communities? What is the actual change that they are making systematically, not just with a building buildings are important, their resources and things like that. But what is the actual impact? If there's a library building being built? What is the literacy rate? How are we accessing students that are in need, so that we can make sure that they're better things being able to be done in those capacities, that my friends is just a little bit of a snippet of everything. That being said, there's a lot to peel back, just like an onion when it comes to sustainable investing. So that I hope that you continue to join us on this series, as we can continue to share with you all of the information that we have, and even then it's just us sharing, and there's so much more, I bet we could probably pick a topic on sustainable investing for every week of this podcast. And maybe someday, eventually we will. But we again, have a passion of tying it into all of those aspects of your life. So on the next episode, or next couple episodes, depending on how we align them in rows. We're gonna talk about besides investing, what are some other aspects in our lives that we can do to make impact in our world? What other financial strategies can we be doing and thinking about, and how do those affect us overall, ourselves, our families, and our communities. So my friends, as we continue this series, I want you to always know that you are worthy of love.

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