When Quinn Schwellinger, 31, and his wife decided to start building an extra retirement fund to supplement their 401(k)s, they knew they wanted to invest in companies that supported their concern for the environment. “My wife and I believe climate change is real, fundamentally,” said Schwellinger, vice president of Badger Ham, a third-generation family-owned business on Milwaukee’s south side. “I wanted to make sure our money wasn’t going toward things I didn’t want it to.”
The couple are part of a growing trend of millennials seeking so-called “ESG investment portfolios,” which direct money into companies chosen for their environmental, social responsibility and governance ratings.
“We’re starting to have buying power and we’re running businesses,” said Schwellinger of his generation. “We have social, governance and environmental expectations and we’re starting to ask questions.”
Sustainable investing is hot, and when Wall Street sees a trend, it wants a piece of the action.
How hot? In 2020, US SIF Foundation, which measures this type of investing, said 33% of U.S. assets under professional management use environmental, social and governance criteria when investing. That’s $17 trillion, or one in three U.S. investing dollars.
No wonder fund issuers are furiously trying to capture those dollars. Morningstar said in July that 25 funds with sustainable mandates launched in the U.S. in the second quarter of 2021, the second-highest number ever issued. As of June 30, there were 437 open-end mutual funds and exchange-traded funds dedicated to this investing style, according to the research firm.
How do you know if your fund is really an ESG fund or just a green marketing ploy? Roll up your sleeves, as more than any other investment style, ESG requires you to know what you want, what you’re willing to pay and what the fund will deliver.
ESG investing adds a layer of squishiness to traditional financial analysis because the heart of it is investing according to your values, and everyone’s values are different. What’s greenwashing to me might be fine for you. It’s much more nuanced than buying a low-fee fund that tracks the S&P 500 index SPX, -0.11%.
Here are eight questions to ask yourself so you can decide whether an ESG fund is legit or is just greenwashing.
Contact: Laura Peck
Research team looks ahead as Riverwater Partners’ SMID Value Strategy reaches five-year milestone
Chief Investment Officer Adam Peck says industry’s lack of ESG focus in small-cap value is inconsistent with value-investing mindset
Milwaukee, October 13, 2021 – Riverwater Partners’ flagship ESG Small & Mid Cap (SMID) Value Strategy marked its five-year anniversary at the end of September. In the following Q&A, Riverwater chief investment officer Adam Peck discusses what’s changed in the industry and at Riverwater since the Strategy’s launch in October 2016.
Together with three colleagues on the firm’s Research Team, Peck maintains a portfolio of 20-35 small and mid-sized companies generally between $250 million and $20 billion in market capitalization. The team also manages an ESG large-value strategy also launched in 2016 and an ESG micro-cap strategy launched in 2018.
Q: ESG assets have more than tripled in the last ten years. How has that affected the ESG small-cap value space?
Peck: The overall growth of ESG-focused assets has been phenomenal, but the small-cap value space is among the corners of the market yet to embrace investor interest. We believe we are one of the only ESG-dedicated investment teams working in small-cap value—both among specialists and within large firms.
That’s something of a surprise because the value mindset has much in common with the ESG mindset. Both require investors to focus on how businesses can improve—and what improvements may be financially material. Both also include actively supporting positive change. And both require an awareness of the larger context in which a company does its business.
Q: Do you still run into a perception that ESG investing is a fad?
Peck: Yes. That’s a misperception that is particularly addressable, in my view, by those of us in the value space. At an intuitive level, value investing is about seeking out companies that are or may be getting better. And some of the avenues that firms are striving to improve—including in response to stock prices in value territory—are along ESG dimensions.
So, what the “fad” viewpoint misses is companies’ own efforts, which are often independent of investors’ interest. ESG isn’t a fad because companies aren’t going to stop trying to save energy. They aren’t going to stop innovating ways to operate more efficiently or trying to appeal to younger consumers who want to buy from companies that share their values.
Q: How does that commitment to ESG show up in your meetings with management teams?
Peck: Compared to five years ago, small companies are drastically more interested in ESG topics. Recently I was on a conference call with management of a trucking company. The CEO proactively raised ESG themes in his remarks, including the upcoming release of the firm’s first-ever sustainability report. This is a very small company. CEOs across the entire capitalization spectrum are realizing they need to embrace ESG factors not only to engage with their investors but to build and maintain healthy businesses.
Q: Has anything changed in five years about how you evaluate ESG factors?
Peck: Our three investment pillars—exceptional management teams; superior business; and attractive valuation—remain our foundation. Three years ago, we rolled out a proprietary ESG scoring system built on those pillars. We maintain our own database based on the Global Reporting Initiative standards.
Q: What’s changed at Riverwater in five years?
Peck: We were certified as woman-owned. We became a Certified B-Corp and received two worldwide awards from the B-Corp organization. We joined UN PRI as a signatory and earned an A-plus rating for engagement. Locally, we sponsored a scholarship program at the University of Wisconsin-Milwaukee and have welcomed several interns from the school.
More than anything, I’m proud of our people. We’ve expanded our Research Team, and now three of the four members hold the CFA credential. We also expanded our team with the acquisition of a wealth management group.
About Riverwater Partners, LLC
Riverwater is Wisconsin’s largest fully dedicated manager of socially responsible investments. The firm applies environmental, social and governance (ESG) criteria as it builds value-oriented portfolios of small, mid and large-sized companies. Based in Milwaukee, Riverwater is woman-owned and a Certified B Corporation™. Learn more at riverwaterpartners.com/.
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For Immediate Release.
Milwaukee (Sept 8, 2021). Riverwater Partners, one of the country’s leading ESG investment firms is pleased to announce the addition of Jan Grimm, as a Senior Wealth Advisor on our Wealth Management Team. Jan is a CERTIFIED FINANCIAL PLANNER™ Professional who has been providing clients with her planning expertise for over 20 years. Prior to venturing out and starting her own wealth management practice, Jan held various positions of responsibility with some of the largest wealth management firms, including LPL Financial, Wintrust Wealth Management and Wells Fargo Advisors.
“We are thrilled to have Jan’s depth of experience and passion for serving clients.” said Founder, Adam Peck. “Jan’s personal values and collaborative spirit is well aligned with our company beliefs.” Jan takes a holistic approach in building her client relationships, including taxes, income planning, and investment strategies. “I want to build the best and most successful plans that evolve with my clients and that are based on trust and transparency.” Jan said, adding “It’s about your whole life, not just part of it, and the answers to today’s financial questions are growing in complexity.”
Jan earned her Bachelor of Science in Business Administration, Cum Laude from Michigan Technological University. She has also completed the trust and estate planning coursework with Cannon Financial. She holds the FINRA Series 7, 63 and 66 licenses, as well as being a Life, Health and Accident Insurance Agent in the State of Wisconsin.
Jan and her husband, Jack, are long-time residents of the Town of Merton, and enjoy all the Lake Country area has to offer. She currently serves as a board member for TEMPO® Waukesha. To arrange a private appointment, Jan can be reached at (414) 858-6777 or email@example.com.
The Intergovernmental Panel on Climate Change issued a stark warning this month that human-led warming from burning of fossil fuels is causing climate change and removing carbon emissions will cause warming to cease.
That makes transitioning to renewable energy like solar power even more urgent. However, reports that China forced Uyghurs to work in labor camps to manufacture the key ingredients in solar panels puts socially responsible investors in an uncomfortable position between weighing preventing climate catastrophe and supporting human rights.
Further, human-rights advocates pushing for better treatment of the ethnic group were inadvertently handed a setback with the U.S.’s withdrawal from Afghanistan. Now that the Taliban have regained control of Afghanistan, China may have heightened concerns of renewed militancy in central Asia, which is near Xinjiang, home to the Uyghurs, who are Muslims, a religious minority in China.
All of this underscores the limits to investing according to environmental, social and governance principles. Global supply chains are often murky and opaque, as many clothing manufacturers have learned. Some issues can best be tackled by governments rather than gaining board seats or otherwise influencing company strategy. In the best-case scenarios, change can take years, but sometimes change never comes despite activists’ efforts. And ESG proponents regularly must weigh competing concerns, in this case environmental and labor interests, and decide where they can have the most influence.
The labor allegations in China
While concerns that Uyghurs worked in forced labor camps were around for several years, a report from Sheffield Hallam University earlier this year uncovered a connection to the solar industry. The report, “In Broad Daylight: Uyghur Forced Labor and Global Solar Supply Chains,” detailed accusations that the Chinese government put millions of indigenous Uyghur and Kazakh citizens from the Xinjiang region into labor camps to mine polysilicon, a key material in panel manufacturing.
Article featured in Advisor Perspectives. May 26, 2021. What if a baseball team trades away its all-stars year after year and replaces them with rookies or aging veterans? That’s the problem with using the Russell 2000 as a small-cap benchmark. Better to let your winners run—and benchmark to the Russell 2500 instead. Don’t miss Riverwater co-founder & CIO Adam Peck published at Advisor Perspectives.
Small caps have been outperforming large caps. Small-cap value stocks, for example, just had their seventh best-ever quarterly return by posting gains of over 21%, as measured by the Russell 2000 value index. This came after they posted their best-ever quarter a year ago, with a 33.4% return in the second quarter of 2020.
Can small-cap value this keep up?
Periods like the one just experienced historically portend well for the relative returns of small-cap value stocks. According to Furey Research, when value has a strong two-quarter relative performance, it outperforms growth by 7% on average the following year.
For investors wanting to capture outperformance in small-cap stocks, here’s a warning. Soon, some of the biggest winners among small caps will “graduate” out of the Russell 2000 index (and by extension its value and growth sub-indexes) when Russell conducts its annual rebalancing this summer. At that point, those winners will no longer be the largest among their cohorts. They’ll be midcaps and will be lumped in with companies that have been midcaps for decades.
Here’s a simple visual on what happens to a “graduate” of the Russell 2000 index:
Before graduation, a small cap is a much larger percentage of Russell 2000 than it is of the Russell midcap or more so the Russell 1000.
Because investors keep relatively fixed portfolio allocations to small, mid, and large-cap companies, the typical effect of graduation from the Russell 2000 is to reduce these winners’ importance to the overall portfolio.
That’s like a baseball team trading away its all-stars year after year and replacing them either with rookies (much smaller companies) or former midcaps that have slipped back (aging veterans).
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Article featured in Valuewalk. May 24, 2021.
For most Americans, 401(k) plan accounts have become the predominant retirement savings vehicle. Currently, more than $6.4 trillion is invested in 401(k) plans across the country, a 73% increase in the past ten years.1 An additional $2.7 trillion is invested in other defined-contribution plans, such as 403(b) plans for educational or non-profit organizations.1
Investment Advice For Your 401(K) Account
The vast majority of retirement plan participants do not consider themselves expert investors, nor do they want to take the time to manage their investments. Investors who want some level of professional advice on investment selection have a few basic options:
Target-date funds and balanced funds
Target-date funds are by far the most popular “do-it-for-me” approach, with 78% of 401(k) plan participants opting in2 —even though the average 401(k) plan offers 28 investment choices.1 Balanced funds are similar except with fixed allocation percentages rather than percentages that change over time.
Some 401(k) plans offer a managed account program, in which an investment advisor serves as a plan fiduciary and provides tailored advice to participants based on their age, risk tolerance, time horizon and other personal factors. Managed account programs may or may not include financial planning services outside of the retirement plan, offering a more holistic view of an employee’s financial picture. These services clearly offer a more customized investment solution to participants, compared to target retirement date funds, but they come at a cost. Because of the advisory fee and perhaps a lack of understanding, only about 5% of participants used a managed account program.2
Professional advice from a financial advisor not associated with the plan
Many investors work with a financial advisor but keep their retirement accounts separate. That is, the advisor is aware of those assets but not charging fees to manage them. Implicitly, this means plan participants either believe they can manage their own investments or are satisfied with the “do-it-for-me” products offered by their 401(k) plan.
Why pay an advisor not associated with a plan?
Advisors typically charge between 0.5% and 1.0% of assets to provide ongoing financial advice.3 This may seem like an unreasonable charge to some; however, evidence indicates that net investment returns can be increased by up to 3% per year.4
Marketwatch. March 24, 2021. By Debbie Carlson
7 ways for ESG investors to profit from sustainable agriculture
The original green sector — agriculture — hasn’t been on the radar for environmental, social and governance investors, given industrial agriculture’s heavy dependence on pesticides, fertilizers and genetically modified seeds.
But ESG investors are turning their interest to agriculture as a way to fight climate change. In November, the US SIF, an organization that follows sustainable investing, said sustainable agriculture was an important investing issue for money managers, the first time this issue cracked the top five specific criteria. Of the $17 trillion (link) invested in ESG issues, money managers (link) said they devoted $2.38 trillion to sustainable agriculture while institutional investors (link) devoted $2.18 trillion to the theme.
It’s a harder investment for individual investors; there are no targeted mutual funds or exchange-traded funds for sustainable agriculture and just a handful of stocks to choose from.
Investing in sustainable agriculture is still in early stages, not unlike where the renewable energy sector was in 2007 as far as ESG investor interest, says Erin Fitzgerald, CEO of USFRA, a national network of farmer and rancher-led organizations that’s working to expand ESG investment in sustainable agricultural technologies. USFRA recently released a report (link) about how ESG investors can think about public or private investments in agriculture to mitigate climate change by improving soils.
That could mean a money-making opportunity for investors, especially if the valuation premiums usually given to ESG companies aren’t priced in. But given that it took renewable energy years to become profitable, there could be stumbles. Plus, some ag companies may be improving their environmental record but also have other aspects that ESG investors find distasteful, such as researching genetically modified organisms or poor worker policies.
WealthManagement.com, March 11, 2021 By Cindy Bohlen
Encouraging news arrived late last year about the fast growth of investments managed with attention to environmental, social and governance (ESG) factors. Seventeen trillion was the headline dollar figure in the latest biannual report from trade association US SIF, which tracks the responsible investing industry.
Seventeen trillion represents a 42% increase over the dollar level US SIF found just two years ago. Today 33% of professionally managed dollars in the U.S. is invested with at least some consideration to ESG issues.
That headline growth is impressive and welcome, but I’m actually more struck by some of the undercurrents in the report, particularly with respect to what investors say is most important to them.
From Governance to Environment to Social…and now back to Governance
Of the three letters in “ESG,” it’s fair to say the “G” came first, in the sense of widespread awareness of the benefit of applying the concept as an investment factor. The level of a board’s independence—for example, by incorporating independent Chair and CEO roles—came up for widespread awareness in the 1980s, as did the level of executive pay.
Advisor Perspectives, February 1, 2021
Burton Malkiel, esteemed author of the classic investing book A Random Walk Down Wall Street is one of the more prominent critics of environmental-, sustainable- and governance-based (ESG) investing. He called ESG investing a “self-defeating” strategy in a recent Wall Street Journal column.
But Malkiel and other detractors who claim ESG is a fad are missing a key element in their arguments, namely that companies are incorporating sustainability into their operations both in response to – and increasingly quite apart from – the ESG investing trend.
People invest in stocks because they want to make money. That’s a basic truth that ESG investing neither needs nor seeks to change. Rather, ESG investing asks, “If you can do good with your money while also achieving attractive returns, why wouldn’t you?”
Marketwatch. January 4, 2021
Environmental, social and governance investing resonates with people who want their investments to align with their values, and the boom in this investing style has fund companies launching more ESG investment vehicles.
But these funds may not be as green as investors think they are.
ESG investing considers both financial return and social and environmental good. But just as investors can disagree on where to draw the line between value and growth investment styles, they can come to different conclusions about how well companies are delivering in these areas. There are no U.S. nor global standards.
Marketwatch. November 13, 2020
Even as the Trump administration actively discourages environmental, social and governance investing in employer-sponsored retirement plans — a rule the Biden administration may overturn — it’s not like investors had a lot of ESG choices to begin with.
When Morningstar looked at lineups for defined-contribution plans like 401(k)s or 403(b)s , the research firm found only 4.5% of these plans offered at least one sustainable fund — that is a fund that intentionally incorporates ESG.
But for those who want to invest that way, there are ways to do it within the company-sponsored retirement plan. It just takes some legwork to find them.
June 11, 2020
Worldwide protests over the past weeks spurred by the killing of George Floyd have brought our society to what we can only hope is a tipping point. We recognize that the effects of racial inequalities are pervasive and profound. In addition to unjust and unnecessary violence, disproportionately devastating realities in the Black community in the wake of the COVID-19 pandemic have further highlighted the effects of systemic racism.
Benefits Magazine. February 2020
Greg Wait of Riverwater authored an article for the February 2020 edition of Benefits Magazine that looks into the limited availability of SRI Investments in 401(k) plans and offers solutions to plan sponsors wanting to respond to the increasing demand for SRI investment from participants.