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The Rise of Socially Responsible Investing


Sparked by millennials and others seeking to back companies that create positive environmental, social, and economic change, the volume of U.S. assets targeted toward socially responsible investing (SRI) approached $12 trillion by the end of 2018. How should investors consider as they approach this fast-growing SRI realm? Don Calcagni, Chief Investment Officer at Mercer Advisors, joins host Doug Fabian to discuss:

  • Why investors increasingly factor environmental sustainability, social justice and other SRI considerations into their portfolio management
  • The expanding landscape of investment options built around SRI and environmental, social, and governance (ESG) principles
  • The tenets of an impact investing strategy that combines SRI and ESG
  • Whether SRI and ESG factors influence investment performance
  • How Mercer Advisors extends clients’ SRI and ESG portfolio options

Doug Fabian: Have you heard about a trend called socially responsible investing? Did you know that there are over $31 trillion invested worldwide this way? Joining me today on The Science of Economic Freedom podcast is Don Calcagni, Chief Investment Officer for Mercer Advisors, to explain the rise of socially responsible investing.

Announcer: The Science of Economic Freedom is intended as an investor education resource. The views and opinions expressed on this program should not be construed as a recommendation to buy, sell, or hold any specific security. Consult your investment advisor and read any investment perspectives carefully before making any changes to your investment portfolio.

This program is sponsored by Mercer Advisors. Mercer Global Advisors Inc is registered with the Securities and Exchange Commission and delivers all investment-related services. Mercer Advisors Inc is the parent company of Mercer Global Advisors Inc and is not involved with investment services.



Doug: Welcome to the Science of Economic Freedom. I’m your host, Doug Fabian. This podcast is all about helping you achieve your financial dreams. We call that economic freedom. This program is about your journey to achieve economic freedom for yourself and your loved ones.

Today, we want to help you identify your next step in that journey.

This is Episode 48, The Rise of Socially Responsible Investing, with Don Calcagni. Now, before we get into today’s topic, let me refresh some of the content that is available here at The Science of Economic Freedom. Let me alert you to some of the most popular podcasts that we have queued up for you. Number one, I want to point you to Episode 24 where this is an interview with Dave Haman on Everything You Need to Know About Social Security. Believe it or not, and it was a surprise for me, this is our most popular podcast. Number two, Episode 27, Everything you Need to Know About Medicare. Number three, Episode 45, Dumb Things Smart People Do With Their Money. This is an interview I did earlier this year with Jill Schlesinger from CBS News on her new book and it’s quite an enlightening discussion and I would encourage you, if you haven’t listened to it already, to give it a look. And then Episode 14 is an Introduction to Factor Investing, which is the strategies that we deploy for clients at Mercer Advisors. And finally, the episode I did last month which was Episode 47, Economic Freedom for Women. So, check out those podcasts and more out at underneath the Podcasts heading, and that’s under the Insights tab.

So, today’s subject — The Rise of Socially Responsible Investing. Joining me is a familiar voice for The Science of Economic Freedom listeners, Don Calcagni, Chief Investment Officer for Mercer Advisors. Don, welcome back to the podcast.

Don Calcagni: Thank you, Doug. It’s great to be here.


Don’s role as Chief Invest Officer

Doug Fabian: Don, rather than me kind of describing what you do for clients and your background, tell us about your role as our Chief Investment Officer.

Don Calcagni: As Chief Investment Officer, I view my role as really being the chief steward of nearly $20 billion worth of client savings at Mercer Advisors. When we think about the wealth that we manage for clients, it’s important to keep in mind that that wealth represents thousands of lifetimes of toil, of sacrifice. Those dollars represent healthcare, they represent tuition, they represent the dreams of over 11,000 families. And so as really the chief steward of our clients’ savings here at Mercer, the Chief Investment Officer’s role is to make sure that everything we’re doing from an investment management perspective, everything we do in terms of process, is really focused on bringing the best thinking available anywhere to our clients’ portfolios. It’s a role where I spend a significant amount of time reviewing academic research, determining whether or not that research is realistic, whether it has merit, and if it does have merit, really researching low cost ways to implement those ideas in the real world.

Part of that role is I’m constantly negotiating with managers, pushing them for fee concessions for our clients. We recently secured fee concessions from several of our managers, and those fee concessions, those savings, fall directly to the benefit of our clients. I think the final and one of the most important roles of being a Chief Investment Officer at Mercer Advisors is we have a duty to educate and to inform, not just our clients but also our advisors, our prospective clients, to really help them separate fact from fiction. We live in a world that is just rife with fiction, ideology, and a lot of, I’ll say, myths around the markets. And so part of my role is to work with our teams here internally to separate fact from fiction.


The process of building your portfolio

Doug Fabian: You know, Don, one of the observations I’ll make after being in the Mercer Advisors world now for three years, and now I’m serving with you on the Investment Committee, is that we are very process-focused. We’re not only building portfolios but it is also important how we do it. Tell us about the processes we follow and why.

Don Calcagni: It’s important to keep in mind that we are a fiduciary and I think you have to always begin and end with that fact in mind. Like I said a few moments ago, we are stewards of our clients’ life savings. And so what that means to me is that we are called to use, what I’ll say, the scientific method with respect to determining what the absolute best way is to invest clients’ wealth. So, we don’t have the luxury of ideology. We don’t have the luxury of buying into myths about the market or investing. And so we are very process-driven, we are very academic in how we approach managing our clients’ savings. We’re very quantitative.

And so if you think about the scientific method, there’s actually seven steps to it, and I won’t walk our listeners through all those steps but step one is you fundamentally begin with a question. What is it that you want to know? Well, here at Mercer Advisors, the answer we’re trying to answer is what is the absolute best way to manage our clients’ wealth. And to us, the definition of best is what is the best portfolio design in terms of balancing risk and return for our clients. And by the way, we’re not the only ones obsessed with answering that question. There are universities around the world with very deep, very large finance departments who are actively engaged in trying to answer that very question.

So, the great thing is is we get to tap into that talent when it comes to answering that question. So, step one is always being crystal clear on what question it is you’re trying to answer. And then the rest of the scientific method is really about conducting research, gathering data, formulating hypotheses, testing those hypotheses using data and certain mathematical exercises. And then from there, ultimately drawing conclusions. What does the data tell us the best approach is to managing clients’ wealth? At least in terms of taking a scientific approach to managing that wealth.


What is the history of socially responsible investing

Doug Fabian: Excellent overview, Don. So, we have a big subject today — Socially Responsible Investing. Let’s ease into the topic by giving our audience some history regarding socially responsible investing because it’s been around for a while.

Don Calcagni: Yeah, socially responsible investing certainly isn’t new. It’s certainly been a very active investment theme in the European markets for quite a long time. It is a relatively new development in the United States, and by new, I mean let’s say over the last 20 years or so. But I would argue that socially responsible investing has really become a powerful force, I’ll say really just in the last 5 to 10 years. In fact, as of today, Doug, there is over $30 trillion — that’s with a “t” — $30 trillion that’s currently invested in socially responsible investment strategies. And that is nearly twice the size of the entire US economy. So, we are seeing massive capital flows into socially responsible investing. And I think this is just a natural outgrowth of consumers becoming wealthier, becoming more aware globally how their wealth is impacting society in terms of environmental practices, social policy, governance, and things like that.

So, just over the last two years, we’ve seen the flows into socially responsible investments grow by about 15% annually just over the last two years. And the fact is that companies are responding to the fact that consumers are taking a more socially responsible approach to determining which companies they want to provide their capital to in terms of investments. And just several months ago, the Business Roundtable, which is really a group of about 200 CEOs of the largest companies in the United States, the Business Roundtable made a statement that today, going forward, the primary role of the corporation isn’t just to maximize shareholder value, but it’s also to pay very close attention to their footprint, their impact on other stakeholders globally. And so that statement from the Business Roundtable was no accident. They were responding to the pressure that’s being applied to them, that’s being applied to their share prices by way of the rise of socially responsible investing.

Doug Fabian: Don, I want to bring into focus an article you wrote recently for our clients where you introduced this concept with this opening paragraph and I’m going to read it now. War, climate change, pollution, poverty, racial and gender discrimination, human trafficking, corporate fraud, gun violence, dysfunctional governments. Today’s news headlines are dominated by a host of serious issues that increasingly rattle our consciousness. It used to be that investors simply had to accept these challenges as beyond their control and best left to the governments to address. But as these issues have become more pressing, investors increasingly conclude that the enormity of the challenges we face requires help from private capital. Now, investors can make decisions about where they invest, what companies they support, and also the companies they want to avoid. So, tell us more about how socially responsible investing actually works, Don.


How does socially responsible investing work

Don Calcagni: So, I think to give our audience a broad overview, I would highlight that there’s basically three approaches to socially responsible investing. And before I explain those, let’s not forget that these three strategies all are focused on delivering a positive financial return to investors. We’re not talking about charity here, Doug. We’re talking about being very selective with respect to who we provide capital to and making sure that those companies are having a positive impact on global society. And so there’s basically three approaches to socially responsible investing.


Socially Responsible Investing (SRI)

The first is what we call SRI broadly. So, socially responsible investing typically means that we apply a series of what we call negative screens to a diversified portfolio. So, for example, you begin with a basket of, say, 500 or 1,000 stocks, and let’s just say for the sake of argument, we want to screen out companies with a very large carbon footprint or maybe an above average carbon footprint globally. So, we can screen out, for example, environmental offenders, big polluters, maybe mining companies that are engaged in practices that we deem as being not very environmentally friendly. So, that’s what we call a negative screen approach. We remove the bad actors and we keep what remains. So, that’s what we commonly think of when we think of socially responsible investing.


Environmental, Social, and Governance Investing (ESG)

But there’s another way, something called ESG. ESG stands for environmental, social, and governance investing. ESG is different and should not be confused with traditional socially responsible investing. ESG focuses on identifying those companies that are best in class. There’s no negative screens with ESG. We begin with those same 500 or 1,000 companies and then rather than explicitly remove certain types of companies that we find objectionable, what we do is we focus on those companies, for example, that maybe have the lowest carbon scores or carbon footprints in their respective sector. So, we’re just focusing on the best actors globally and then overweighting our portfolio by putting more capital into those companies.


What is impact investing

Impact investing is really a combination of the two. But I’ll take it one step further. Impact investing, which is the third type, the third approach to investing responsibly, focuses typically on solving a specific issue. So, for example, we have a gender equity portfolio that focuses on diversity in the workplace, and diversity on corporate boards. That portfolio is focused on owning companies that have above-average representation by minorities and women on their corporate boards and among their management teams. So, what we do is we basically remove all the companies, so that’s a negative screen, that have below-average representation on their boards and then we focus only on owning those companies that have above-average representation. And in that way, the intent is that we’re going to have a meaningful impact on a very specific issue that is important to the investor.

So, Doug, those are the broad three approaches to investing responsibly, but I would like to underscore all three of those approaches are focused on earning a positive financial return for investors. They are not charity. They’re just focused on providing capital to those companies deemed worthy by the investor who’s working with the advisor to construct the portfolio.

Doug Fabian: Great overview, Don. Now, Mercer Advisors as a firm has made a commitment to how we are going about introducing socially responsible investing, ESG, and impact to our clients. Talk about what we’re doing firm-wide.


What Mercer Advisors is doing firm-wide

Don Calcagni: So, first off, we were one of the first fee-based national wealth management firms to sign the United Nations Principles for Responsible Investing and we did that for several reasons, Doug. First off, we wanted to begin collaborating with other large global asset managers with respect to identifying and putting in place best practices, best socially responsible practices when it comes to managing client wealth. And so this has really become an excellent forum for folks like me and other like-minded organizations to come together to share best practices. With that declaration also comes a commitment. We are committing to incorporating best ESG or socially responsible practices into our investment process. All of the managers whom we hire and allocate capital to are now required to report to us specifically what they are doing to expand diversity in the workplace, what they are doing in terms of environmental sustainability, and to improve social and overall governance inside their organizations and how they approach portfolio construction.

What it also means, Doug, is we’ve made a declaration to be active owners in how we vote proxies and who we choose to work with and how we go about structuring portfolios. So, we do vote proxies for our funds and our proxy voting methodology is focused on putting in place a best ESG framework for how we vote as shareholders on behalf of all of our clients.

And I think finally, Doug, given our size in the industry as one of the industry’s largest wealth managers that’s independently owned, I think we’re uniquely positioned to really use that leverage to pressure asset managers not only to promote best ESG practices within the industry, but to work with them to improve the quality of their investment offerings. There’s a lot of what I’ll call greenwashing out there on Wall Street, where asset managers are just trying to make certain strategies on the surface look like they’re environmentally or socially friendly. And we actually dig deeper to determine whether or not indeed those strategies are genuinely reflective of what we would call best practices in socially responsible investing. So, we partner with those organizations to communicate very clearly what it is we expect in terms of their behavior and how they go about structuring their portfolio.

And maybe one other point, Doug, that I would add to this is we’re making a commitment to expand, not just advisor awareness of socially responsible and ESG strategies, but also trying to help educate clients better around what’s available to them. I mean, after all, this is their money, this is their capital, this is their life savings. And if they have specific views, specific social concerns, or environmental concerns that they would like to see manifested in their portfolio, I think we have an obligation to make that a reality for them. So, we’re making a commitment to help our clients ensure that their portfolios better reflect their personal values.


Potential loss in socially responsible investing?

Doug Fabian: Don, we’re in the, I’m fond of saying, the scoreboard business. Investment performance does matter. Talk to us about whether or not there’s going to be a change in expectations relative to incorporating a different investment style into one’s portfolio. Are you giving up potential return?

Don Calcagni: You know, that’s an interesting question and it’s a very important question. I mean, after all, like I said earlier, Doug, we are fiduciaries. Our primary mandate is to manage our clients’ wealth in a fiduciary capacity. But here’s the interesting thing. I have met with a number of academics, I have met with some of, I’ll say, the most cutting edge thought leaders in the asset management profession. I’ve pored through probably close to 200 academic reviews on the performance of socially responsible investing strategies. And Doug, we see no, no negative impact to client portfolios when it comes to structuring portfolios that focus on socially responsible companies.

And let me just give you a data point. The MSCI KLD Social Index — that is an index that is made up of the 400 largest, most socially responsible companies as determined by MSCI, which is an index provider. If we look at the performance of that index from 1990 to 2018, the return on that index over that period was 10.5% per year over that period of time. The S&P 500 Index, which has no socially responsible screens or filters or anything like that returned 10.05. So, let me say that differently. The socially responsible index actually slightly outperformed the S&P 500 Index by about 45 basis points, just a little bit less than one half of a percentage point annually. My point is this. If you have a socially responsible portfolio and if it is properly diversified, and I think that’s the key point, there is no reason mathematically to expect that that portfolio should underperform the rest of the market on a go-forward basis. And so I think that’s a great thing for investors to take away is that, look, we can build a portfolio, so long as it is diversified properly, that reflects your values without compromising return.


Implement socially responsible investing?

Doug Fabian: So, let’s talk about how we go about implementing these strategies and since we do have listeners to the podcast who are not clients of Mercer Advisors, how would an individual investor go about accessing or reviewing and researching their investment options in the SRI ESG impact space? So, let’s talk vehicles and some general direction on providers, Don.

Don Calcagni: Certainly happy to do that. So, at Mercer Advisors, what I’ll do is I’ll speak first to the offering that we have and then I’ll point investors in the right direction where they could go outside of Mercer Advisors. At Mercer Advisors, we take a vehicle agnostic approach to building portfolios for our clients. And what that really means is we use mutual funds, we use ETFs, we also use individual securities including stocks and bonds.

Typically, mutual funds and exchange traded funds make sense for smaller investors with smaller account balances just because it’s easier to build a more diversified portfolio using a mutual fund or an ETF as part of a portfolio. So, we do have a whole series of very low cost socially responsible mutual funds and exchange traded funds, ETFs, that we use with clients that have smaller account balances. And by the way, by smaller I’ll say less than $250,000.

We also have some very sophisticated capabilities for clients with account balances that are greater than $250,000. And by that I mean is we can build diversified portfolios that consist of individual stocks and we can customize the stocks in that portfolio using a series of 17 different negative screens, I talked about negative screens earlier. We also have a climate change portfolio, a series of other impact portfolios including climate change, gender equity and diversity, as well as a few others. So, we can really get granular and partner with our clients to really build highly sophisticated, really truly personalized stock portfolios.

By the way, we can also apply that same logic to bonds. So, even the bonds in our portfolio which, for those who aren’t familiar, a bond is just a loan to a corporation or a government. We can even apply the same socially responsible thinking to the bonds that we choose to incorporate in our portfolio. So, we have a host of low cost options, Doug, for clients. Just depends on really the size of the account balance and really what it is they’re trying to accomplish.


Additional information on socially responsible investing

For those who are looking to get some more information on socially responsible investing, I would point them towards Morningstar. I think Morningstar has done a fair job of putting more information on its website with respect to socially responsible investing. I would also encourage investors to go to the United Nations website, the UNPRI, United Nations Principles for Responsible Investing. And I would make sure that the firms that you are considering working with in your portfolio are signatories to the UN’s PRI. So, those would be two places that I think investors could go to get some fair and balanced information on socially responsible investing.

Doug Fabian: Don, one of the things that came out of our research is that there are certain groups of investors who are very interested in socially responsible investing, ESG, impact. Tell us about that and what we learned.

Don Calcagni: So, there was just recently a study done by Calvert, which is a socially responsible asset manager. And by the way, the findings from this study have been corroborated by a series of other studies, whether they be academic or industry. And what we find is about 30% of all investors in the United States, all investors, are interested in socially responsible investing. So, this is not a fringe movement. But if we dig a little deeper and we start looking at the data in terms of generation or gender, what we see is pretty revealing and that is 70% of millennials are seriously interested in socially responsible investing. When you think about the very large intergenerational transfer of wealth that is about to occur here over the next 30 years, that is definitely a demographic trend, a development that advisor firms and advisors should be very aware of. And Wall Street is certainly very much aware of that demographic trend.

To take it one step further, over 90% of female investors have identified environmental sustainability as one of the most important factors to them when it comes to determining who to invest with. And when we consider the fact that female longevity is longer than that of males, again, that is another very powerful demographic development that I think Wall Street is certainly very aware of and I think as we are seeing from the Roundtable announcement several months ago, Doug, Wall Street is responding to that reality. So, socially responsible investing, my argument, I think the data shows that it is not a fringe movement, it is very much mainstream, and it’s actually gathering steam.



Doug Fabian: Don, that was an excellent overview on socially responsible investing. Thank you again for joining us on the podcast today. We really appreciate your insights.

Don Calcagni: Great. Thank you, Doug. It’s great to be here.


Action Steps

Doug Fabian: Ladies and gentlemen, before we go, let me give you a couple of action steps from today’s podcast. Number one, if you’re interested in more information about ESG, socially responsible investing, do some research As Don pointed out, there are exchange traded funds, there are mutual funds that are specializing in this area. Don mentioned Morningstar as a potential source to go to for more information on this subject, so I encourage you to do some research.

Second, talk with your advisor, look at your 401(k) plan. There may be ways for you to be able to start to implement socially responsible investing if that’s something you want to do in your own portfolios. And if you’re a client of Mercer Advisors and you want to learn more about how you can move your portfolio in this direction, please speak with your client advisor.

And then lastly, I just want to encourage you all to send me an email, give me your comments on today’s show, and on future topics for The Science of Economic Freedom podcast. My email address is, This is Doug Fabian. Thank you so much for joining us today.

Announcer: The Science of Economic Freedom is intended as an investor education resource. The views and opinions expressed on this program should not be construed as a recommendation to buy, sell, or hold any specific security. Consult your investment advisor and read any investment prospectus carefully before making any changes to your investment portfolio.

This program is sponsored by Mercer Advisors. Mercer Global Advisors, Inc. is registered with the Securities and Exchange Commission and delivers all investment-related services. Mercer Advisors, Inc. is the parent company of Mercer Global Advisors, Inc., and is not involved with investment services.

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