The Real Market With Chris Rising – Ep. 36 Jeff Gitterman
The Real Market With Chris Rising – Ep. 36 Jeff Gitterman
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Chris Rising: 00:02 Welcome to the real market with Chris Rising, the only podcast that brings the real estate conference panel to your headphones. You’ll hear from superstars from every realm of commercial real estate, the biggest brokers, the most well known architects, the largest investors and the most visionary developers. Learn what they do, how they do it, and what drives their success. We’ll discuss the latest trends across regional markets, capital flows, both national and global and we’ll explore technology’s role in shaping all of them. We’ll take a clear eyed look at where we’ve been, where we are now, and what’s to come. Real conversations, real experts, real insights. This is the real market.
Chris Rising: 00:50 Welcome to the real market with Chris Rising. I’m pleased to have Jeffrey Ghitterman who is the co founding partner of Gitterman wealth management on the podcast today and what’s interesting is Jeffrey and I were introduced to each other because we both share a passion for impact investing. While mine has been very focused on carbon reduction and health and wellness, Jeffrey as a wealth manager has a much broader view on all of this. Jeffrey, welcome to the real market.
Jeff Gitterman: 01:21 Thank you so much Chris for having me and Jeff is okay in the essence of time we’ll save us a fillable.
Chris Rising: 01:30 I appreciate that. Why don’t we just get started and tell the audience a little bit about Ghitterman wealth management and what makes you so different that will probably lead into how we got introduced.
Jeff Gitterman: 01:43 Yeah, no problem. We were traditional wealth management firm focused on the college professor marketplace for about 20 years and back in 2014 I had the pleasure of being introduced to a film called planetary that we wound up helping to produce with Bill McKibben and Paul Hawken and a host of astronauts and indigenous elders. It opened up my eyes to the area of impact investing to the challenges facing our planet and humanity and that the capital markets actually could be used as a solution to help fund capital towards those problems. We really haven’t looked back since that moment.
Chris Rising: 02:31 I know you’ve grown your assets under management and you’ve made over the last several years, great strides in this, but I have to imagine that a lot of times people, the first thing they say when they hear things like Impact and ESG is, I’m not really interested in philanthropy. I can do that on my own. When you first get approached by someone or you approach someone, is that kind of the first question out the door at you or how does that come about?
Jeff Gitterman: 03:03 One, our market allows for ESG and impact investing probably better than any other target market. So, if we have advisors that we’ve got 14 different advisors in the firm, if we have advisors that raise it, it’s rarely resistance by clients. We also are a co CIO for other advisory firms and when I’m out speaking to advisors, that’s where most of the resistance comes from. I’ve really identified that it’s a two fold thing. One, most advisors that are in the tail end of their careers just don’t want to change anything, especially after an 11 year bull market. It’s kind of why change now since things are going so well? But the other thing is that most advisors do not understand what ESG or impact is. We’ve spent a lot of time on education around both those subjects and delineating the differences between ESG responsible or SRI investing in impact is, probably what we spend 50% of our time doing in the advisor community and through our conferences and webinars and now TV shows.
Chris Rising: 04:19 You’ve been identified as the ESGs expert in this area of wealth management. I’ve heard your name several times around it. Could you give us just a view of why you think ESG is different than Impact, but yet how they play together?
Jeff Gitterman: 04:36 Yeah, and I’ll add SRI into that category because those are the three sleeves that we try to differentiate. In a pyramid we have the ESG as the base of the pyramid SRIs the middle of the pyramid Impact as the top of the pyramid. We use this analogy that ESG is the GPS of investing to help guide clients through the languaging and subject matter of the three and, basically what that means is that, 25 years ago if you wanted to take a road trip, you had this thing called a map and it was a very one dimensional view of the trip that you were about to take. It didn’t give you any current data about that trip. It didn’t tell you about road closures or flooding or traffic or cops hiding in the bushes. Today you jump in your car and you have a GPS and it feeds you all this live data about detours at different routes and updated disclosures.
Jeff Gitterman: 05:27 To us that’s what ESG is. ESG is the access to big data that allows for the screening of billions of bits of data around companies that we’re investing in today to give us up-to-date information about potential risks or exposures around environmental, social and governance issues. But it’s not SRI and the way we described SRI is just like in your GPS. Once you put in your destination, then you have these route preferences come up where you could take no toll roads, you can take shortest route, you could take the scenic route. That’s to us what SRI and values based investing is. Its personal preferences or values that you layer on top of your investment themes because those values are more important to you than the actual time or distance of the journey. No tobacco, no fossil fuels, no fire on. Those are our personal values that you lay on top of the ESG data.
Jeff Gitterman: 06:28 ESG data look at every industry and it’s nonspecific and it’s not exclusionary and it’ll give you data on what’s the best oil companies. If you’re going to buy an oil company, why not buy the one that treats the environment the best, that cleans up after their drilling better than other companies that has less lawsuits, that has better track record with employee retention and less lawsuits and complaints by employees. ESG is a uniform data set that in our mind, you’re not being a fiduciary if you don’t look at, but then making exclusions or values conversation.
Jeff Gitterman: 07:03 ESG is value looking for value, but making a values decision is SRI and then, we call it Impact the destination because impact is intentional and should be measurable. ESG is really not that. You can’t really measure the impact or additionality of not owning a stock or owning a stock in the market because of the ESG data. But when you’re doing impact, just like the address in the ESG or in the GPS, you’ve made an intention and you could measure at the end whether you’ve reached your address or if it’s a fact, whether you’re there, and again, that’s why we refer to that as impact because the impact is highly intentional and should be able to be measured that your money is actually making a difference on the things that you’re investing in.
Chris Rising: 07:51 Let me ask-
Jeff Gitterman: 07:51 Sorry for the long answer.
Chris Rising: 07:52 No, I think it’s very important you’re laying out a roadmap here of what it means in the ESG world and the SRI world and the Impact world. It’s very important because these are all catch phrases that are being thrown around. This morning I saw Larry Fink from BlackRock talking about how important these kind of issues are. It’s amazing to me that it’s taken some of the largest managers of wealth till 2020 to have their “aha” moment. Could you dive into a little deeper, you talked about the film planetary, which is a very important documentary. When did you go from, I really want to make money for my clients who are mostly professors who are going to retire one day too. There’s something bigger here. What was the moment or moments, and then what path, was it a linear path going up or was it a zigzag path? Why don’t you talk a little bit about that journey of yours?
Jeff Gitterman: 08:51 Spending time with people like Bill McKibben and Paul Hawken and most importantly Ron Garan the astronauts who’s featured in the film. I wound up becoming friends with him over time and getting that perspective of earth from the highest possible perspective you could ever have from being an outer space looking down on earth, was incredibly transformative for me. His view over time, the view of many astronauts that I got to either speak with personally or there’s a film out called the overview effect, another documentary by the same director from our film that’s available for free out on video. I think that’s licks or Amazon overview effect. Interviewed all the living astronauts at the time about this experience that they had from seeing earth from outer space and the experience boils down to this. You go from thinking of your isolated house and you’re isolated geographically mapped location on the earth to being your home, to the earth being your home.
Jeff Gitterman: 10:02 There’s a line in the movie planetary that says, we’re not on this earth we’re of this earth. Hearing that statement was unbelievably transformative in my own personal journey to set me off on a course of learning around about issues that we’re facing around climate change specifically, which was really the point that I kind of focused in on the most early on. And trying to bring that back into, are these themes investible? Is ESG a working theory that actually doesn’t attract from return, potentially reduces risks? Learning all of that took years. We started our research in 2014, we didn’t launch our first portfolios until summer of 16 and we’re constantly evolving our understanding from there. We started with climate mitigation as a theme and developing fossil fuel free portfolios and then coming to a really strong understanding that, that wasn’t going to change the trajectory that we’re on and that climate adaptation strategies are actually more important and understanding, a little bit like what Larry Fink said today. Understanding a company’s preparedness around climate change is becoming critical to us and we’re now building portfolios around those themes.
Jeff Gitterman: 11:29 It’s definitely been, I don’t know if it’s exact or up and down, but it’s definitely not been a straight line journey. I was writing my mission statement as I try to rewrite it annually and it’s really understanding that we’re constantly going to have to be evolving our thinking, because the world is changing so quickly is an important acknowledgement that this isn’t a stagnant factor based investing theme that we could look back over 700 years or 200 years and make that strong.
Chris Rising: 12:05 You also feel, I know you’ve talked about it a little bit that making decisions in this way using your sustainability metrics that you applied all this, you feel this is the way you make more money. Correct? You’re not doing this so you can go back to your investors. You should feel very good about yourself because you’ve made these decisions. It’s in your mind, your clients will get a greater return what this kind of investment philosophy, is that correct or?
Jeff Gitterman: 12:38 I would want to differentiate. I believe that ESG investing does not absolutely drive Alpha and it’s not a factor like momentum or value or tilt that could be shown over time to draw Alpha. I think ESG is just looking at companies that are creating value, and if ESG has done right, McKenzie has a great paper about this, then ESG done right is a value creator for a company. Over the long term that should reduce some tail risk. But ultimately all companies are going to adopt ESG strategies. They’re going to be forced to it by the market because there’re already signs that access to capital both debt and equity are getting more expensive for companies that underperform on ESG metrics. In that regard, ESG is just the right way to do business and that there’s actually no way you should lose any return and potentially you could avoid some risks.
Jeff Gitterman: 13:40 Impact, however, I believe is absolutely the way that we’ll see fortunes being made. Because when you have a large problem, and I’ve just wrote an article about this recently. Climate change to me is the first black Swan event that’s being telegraphed. We’re going to look back and people that didn’t try to adapt to the risks around climate change are going to look like complete fools. But, it’s literally the first Telegraph black Swan event. We know that things are changing. When I talked this to the people, I try to narrow it down to three things we’re going to experience more heat, more floods and more drafts.
Jeff Gitterman: 14:20 To make it really simple, you’re a real estate person that is actually already by a number of companies including Four Twenty Seven out on the West coast being screened into real estate risk metrics that as evidenced by Moody’s purchase of Four Twenty Seven in October, is a clear Telegraph that real estate and debt is going to start being raided around climate preparedness. If it’s not priced into the market already and I don’t think it is priced the market, we have a unique opportunity to make investments that are mispriced currently, because right now a house in Colorado and it’s not priced any differently or the insurance around the house in Colorado than a house in Miami, but we know that’s going to change over the next five, 10, 15, 20 years. So-
Chris Rising: 15:12 [crosstalk 00:15:12] I wouldn’t argue, we are starting to see it though because if you look at the insurance of homes say in Malibu, my friends who own homes there found it impossible to find insurance after the fires a few years ago, a year ago. We’re already hearing in Miami the cost of flood insurance has gone up so much. I think we’re seeing the beginnings of it, but what we haven’t seen in which we will see is, home values drop in areas that have more risk around climate change effects. It’s unfortunately for a lot of people, it’s going to drop like a stone because all you have to do is see what’s happened in Australia and know, wow, massive devastation and my home is now worth half of what I thought it was the day before.
Jeff Gitterman: 15:58 Yeah. You look in where the fires were in California, private insurers have kind of walked away and state insurance is three times the cost of private insurance. A lot of those people are not wealthy people. They aren’t going to be able to rebuild even if they have insurance coverage. Those homes in those areas are going to become potentially worthless at some point. I heard PIMCO talk about abandonment risk around bond issuance, if you haven’t in a commercial building in Miami, downtown Miami, and all of a sudden the reinsures walk away and Spencer McLendon and what’s whole talks about this a lot. The minute the reinsurance walks away, the property’s worthless and the bond holders get stuck holding the bat. So again, it’s from an impact standpoint, there’s fortunes will be made and lost around just being able to be thoughtful around what these risks entail.
Chris Rising: 17:00 There’s a one area you can look to for this too is, you look at California and the seismic buildings that have a high insurance rating, it’s more generically called a probable maximum loss and it’s more specifically under written loss or estimated loss. But if your SEL or SEO is too high, you can’t get insurance for it and therefore, we’ve seen this in the seismic area and it’s just a natural progression over to the effects of climate change. When you have spent the last few years putting this all together, you haven’t just done it on your own in your office and talk to a few clients. You’ve been really viewed as a leader in ESG and Impact and you’ve put together conferences and you mentioned just briefly a television show. Can you talk a little bit about what you’re doing in terms of leadership in this area?
Jeff Gitterman: 17:58 Advisors are at a disadvantage because they don’t really understand the space. All the studies coming back, whether it’s JP Morgan’s, Trends report or Morningstar or any of the industry leadership magazines and studies are showing that the consumer wants product, and that the demand is in the 88% range for values in the ESG being portrayed through their investment portfolios and their investment choices. But only 6% of advisors are highly interested in the space. There’s a huge missed opportunity and about four years ago we just said, “look, let’s just start holding conferences” Initially it was for our own edification rather than travel to all these managers, if we own the conference, they all show up in one place in one day. It would save us a lot of time and energy and we invited some friends. In the first year we had a hundred people and last year at the United nations we had a thousand people register for the conference.
Jeff Gitterman: 18:59 In four years it’s grown tremendously. Then we started doing webinars. The last webinar we did, we had 1700 advisors on it. We said, “we’re not reaching enough people that way yet” and we just launched a TV show called the Impact, which will start airing on Bloomberg on the 25th, and that’s really the focus in on educating consumers and the adviser that this type of investing is available today, that it’s working, it’s thoughtful, returns are excellent, you’re not sacrificing anything.
Jeff Gitterman: 19:35 Really getting these explanations out in the way that people digest information most, which is by video today in short bites, that’s our attention spans are waning quickly. Just being able to provide as much information as possible. We put out white papers, webinars, blogs, everything we can do to educate the advisors space, because that is when the money will really start moving. The clients right now are going to advisors and the advisors are pushing them away saying, “Oh no, you do that with your philanthropy” like you said earlier. We focus on profit on investing but that world is changing quickly and we need to get more advisors on board.
Chris Rising: 20:19 We’ve heard a lot of the big pension funds out of New York, yesterday there was an announcement about doubling the impact investing that the state’s going to do. I’ve heard it in California with CalPERS and CalSTRS, but what we haven’t really seen is how that trickles down beyond the stock market. How do you think Impact, ESG, SRI is going to affect private placements, whether it’s, private equity or real estate, some of the other places where it’s outside of trading a stock or trading a bond.
Jeff Gitterman: 20:58 You have to watch the money, hedge funds and private equity is a good example, but especially around hedge funds, you’re seeing capital flows dwindle. Part of that is due to the fact that passive strategies have grossly outperformed for the last 10 years. You’re seeing most of the rise of investment dollars in ETFs over the last 10 years and hedge funds are actually reacting by moving towards the ESG. I remember going to some of the like 13D conference, five, six years ago and you’d hear nothing about ESG and now every other speaker is talking about ESG and adding Alpha through ESG. In the private equity space, you’ve seen a KKR, Apollo, TPG rise fund, there’s $1 billion launched ESG impact private equity fund every other day lately and I don’t think that’s slowing down at all. Jeff Gitterman: 21:53 A lot of that is being driven because the endowments and foundations are asking for it. I had a manager in this morning, I won’t name the company because they’re not that far along in their impact or ESG journey, but they’re managing $60 billion and they said, every request they’re getting right now is not just, are you doing ESG? It’s not that. It’s can you show the process by which you’re measuring companies preparedness around TCFD or climate change specifically in your portfolios? These are requests especially coming out of Europe and Australia, but even more broadly now coming out of the United States, the common fund announced the other day, the mandate around the SJ and crazily, if you go to Goldman Sachs website today, you’ll feel like you landed on some green sustainable fund company’s website. There’re cows, the nature paths and they have a brand new $750 million commitment.
Jeff Gitterman: 22:59 What’s interesting about that is they said they’re not doing it to the…they were very upfront about it. They said, “we’re not doing it to be altruistic”. We’re doing it because that’s where the market opportunity is. It’s going to take some time for the traditional advisers and wirehouses to catch up. But about six, five years ago when we started mapping this all out, we saw three trends that we thought were incredibly relevant to what we thought about investing going into the future. Those three trends were millennials interests around work, spend and invest, much more values and purpose and mission aligned than any prior generation. We knew that by last year they would become the largest percentage of the workforce. Ultimately, the transition of, well people say it’s anywhere from 15 to 60 trillion, but some transition of large amounts of wealth from baby boomers down to these investors who will want their values represented much more in their investment strategies. Jeff Gitterman: 24:06 The advent of big data and the data providers that are able to source and provide data and analytics around ES and G topics on impact now with companies that are doing geospatial analysis of real estate and other things, then, third climate change. We thought all three were on a hockey stick rise. Certainly big data has been proven because of Moore’s law to be that. But obviously millennials growing into the work population was a clear trend and climate change we felt was a clear upward rising risk and trend. Unfortunately, I hate to say it as a trend and that all three of those would converge and change the investing landscape across the board.
Chris Rising: 24:52 It’s interesting because I agree on all three. One that people have tried to push back on the climate change and the evidence is so clear. It’s hard to do that. I agree with you on the data. On millennials, so much of our investment thesis is around where millennials want to live and work. Then, I’ll get into these debates where people, I feel there’s a group of baby boomers and maybe some gen Xes who are trying to pounce on, the millennials are not really different. They all want to live out in a house with a picket fence and drive their car and there was an article in the wall street journal a few months ago that said, “no, no, the millennials are leaving the city”.
Chris Rising: 25:35 There was a massive push back in the opinion section in the comments saying that study was flawed. They may be leaving downtown Manhattan, they’re actually moving from there to Brooklyn to raise a family. It’s still an urban environment. It’s still that. Is there any evidence that you’re seeing that the millennial piece of that three legged stool is softening? Or do you feel like as they get older their concerns are just getting further embedded in their beliefs and from investing and spending money? Jeff Gitterman: 26:10 Yes. To back up one second, the baby boomers believed that because they lost their purpose and passion, they got absorbed into the system and the most flawed aspect of being a human being as you think everyone else thinks the way that you do. You don’t understand when people don’t, but, the entire sixties’ generation that started out as hippies and antiwar, grateful dead, they all got absorbed into the current culture. Their belief is that, this generation while they look different, will get absorbed into the current culture. We’re seeing huge work trends and I’m sure you’re seeing the same thing around millennials that is not going away. They want to have much more flex time. They want to work from home. They want to work in pods and not work in separate isolation.
Jeff Gitterman: 27:09 They want to have days off to do philanthropic endeavors. They want to be more mobile, they’re more transitory. They change jobs every two to three years. All the evidence is just getting I think stronger and not waning in any way. Will certain aspects of them get forced into adopting the culture? Yes. A lot of them, own less things, unfortunately it’s part of this whole, there’s a word for it in fashion, this whole fast fashion because they’re not as concerned with their clothes. They’re wearing cheaper items two to three times.
Jeff Gitterman: 27:47 You look at Zara as a company and that guy for short time was the richest guy in the world because he saw a trend in millennials shopping and behaving differently than their predecessors. He became literally the richest guy in the world for a little while before Gates and Bezos passed him again. I don’t think the evidence is going away at all. You’re seeing a lot of urban buildings, whether assemblage or core club or a lot of things going on in Manhattan all around these more communal workspaces and we work in general as an example while you know the leaders had some flaws. It was still a sound idea and will ultimately pan out as an investment piece.
Chris Rising: 28:29 Especially I’ve talked a lot about we work on this show and I think their steps were kind of easy to see from the outside once that as one came out. The concept that people want more flexibility, that they want more density, that they want more community. I agree with you. For an office building to be successful in a multi-tenant office building, you have to provide those, whether it’s through what we work on or something like that. It has to be experiential. One of the things as a gen X who’s tried to please the baby boomers and now wants to work with and have millennials work for me. I feel like my every day in my head snapping one way or the other. One of the things that I find that isn’t appreciated as much by boomers because they don’t use technology, is how technology has driven these changes and they’re not going away. They’re just not. When you can do everything on a cell phone, why do I need an office? Maybe I need a plug-
Jeff Gitterman: 29:39 My son works three jobs, not three part time jobs. He actually has multiple full time jobs because he can work from home. When no one’s watching your time, as long as you’re getting the work done, you’re getting paid for the work. The company is ultimately getting more value for their dollar because he’s working way cheaper for that company, for each of the three companies than he would be if he was working full time in an office for one of them.
Jeff Gitterman: 30:10 The economies of scale that are being created by remote work by… There’s one other huge factor that our generation didn’t have to deal with climate change. There’s two things, nine 11 there’s 2008, the recession and the crafts that are affecting the younger generations. But ultimately there is this hangover effect of climate change that is making people feel much more impassioned about experience and living their life today and not putting off living their life until they retire at 65. The worse it gets, the more that’s going to be driven.
Chris Rising: 30:53 I agree. There’s something real about this okay boomer movement, where the millennials just kind of shake their head and say, okay boomer, because the fact is the millennials are bigger, they’re younger, they’re growing and decisions are being made not by gen Xes or boomers, they’re being made by millennials today. If you take that back into the investing world, to think it’s going to go away after a couple of years or after a child or two. I just don’t see any evidence to show it and every time someone tries to present the evidence, it gets shut down so quickly. I agree with you.
Jeff Gitterman: 31:28 Same on climate change. I still have people sending me videos from 2016 from the same guy that was the marketing voice for big tobacco and they were arguing against cancer. It’s like literally the same guy repositioned his career into climate change and started working for the fossil fuel companies. I’m like, do you have anything more current than 2016? It’s a video of a guy that’s not a scientist. It’s a marketing expert. But yeah, the same thing. All the evidence against climate change gets quickly shot down.
Chris Rising: 32:00 One of the things that’s difficult though is we have an administration who Xes believe in climate change thinking anything about it is caused by the Chinese. You have our department of interior and energy and commerce, all producing legislation and regulations or freeing regulations that are not helpful to trying to solve climate change issues. How does that work into your investment thesis? If the administration is going to change the rules and come down to California and say, “you can’t have your own auto emissions”. Does that affect the way you look at investing? Or do you keep the current political climate out of…can you keep it out of the ESG and Impact?
Jeff Gitterman: 32:48 It’s had a huge impact because, most climate change strategies that have come to market are low carbon strategies, arguing about the cost or not the lack of valuation of stranded assets and carbon tax or carbon pricing. Our thesis is completely the opposite. Our thesis is that, there is no political will for that in the United States at all. Therefore, physical risks of climate change will become greatly exasperated before we see any of those other factors.
Jeff Gitterman: 33:26 We actually don’t think those portfolios are positioned well and not only that, but it takes away the fact that some of the biggest benefactors of alternative energy will be traditional fossil fuel companies. They will, not all of them certainly, but some of them will figure out a way to transition and Chevron is doing maybe a better job than Exxon and that’ll play out. But just having a fossil fuel free portfolio is not necessarily a climate aware portfolio anymore. That political landscape plays greatly into the types of portfolios and what we are focused on in the strategies we’re building.
Chris Rising: 34:05 As you look at 2020, what do you think the biggest risks are for your investment strategies as it relates to climate change?
Jeff Gitterman: 34:16 I definitely think that…one of the markets will be pretty flat, maybe up five or 6% of the year. The biggest risks for us are around major catastrophes and we don’t know when we’ll see them. Building portfolios around that pieces is not really proven. We’re really looking the opposite and what are the opportunities sets? Where is investment dollars going to go because of climate change and sustainable infrastructure, real estate that is screened around climate risk, access to clean water, clean energy and new investment waste is a huge theme for us, because it’s something that we had the ability with technology to address more and more and the advancements in that over the next two to three years will create some of the biggest companies in the world. Especially with pressure from China not accepting our garbage anymore so, forced solution.
Jeff Gitterman: 35:27 I’m really looking at, like you said in the beginning from the impact standpoint. What are the positive investments that we can make in light of the future risks that we’re facing that we might not see tomorrow but certainly over the next decade? How do we position our portfolios to take advantage of those investments and then de risk where we can around things like real estate where it is becoming clear that you can de-risk your portfolio. If you’re investing into reeds and companies are doing geospatial, analysis and Four Twenty Seven is doing flood risk analysis. You can opt for the wreath that has much less flood risk and low lying, exposure in the real estate portfolio. Usually right now, both those portfolios have the same return. You’re not giving up anything by de-risking your real estate portfolio right now. That’s the areas we’re most focused on.
Chris Rising: 36:22 When you meet with a potential client and they say, look, I’m interested but give me some baby steps. Is that something you would do? Or you just say, look, here’s a portfolio that is non-impact focused non ESG focused and here’s ours. Is it an all or nothing approach when you’re talking to people about this or, how do you walk someone through?
Jeff Gitterman: 36:44 For me it is. As a firm, we still have both strategies. I made a personal decision five years ago that I would only work with clients that accepted ESG strategies. Actually what I realized is that, our ESG strategies are just fully diversified portfolio. There’s no differentiation between that and a standard portfolio and there’s not going to be under performance because of ESG. At the end of the day right now under performance or out performance is because of the stock ticketing more than it is because of the ESG data. To me, I feel totally comfortable putting my portfolio in front of you if you don’t want to have any discussion around it yesterday.
Jeff Gitterman: 37:27 At the same time I feel fully comfortable putting my portfolio in front of you, if you want to have a detailed conversation about ESG and then if you want to move into impact, then we also have impact portfolios that are more unfortunately for clients with $1 million or more to invest, because a lot of these more impact driven investments are on the private side. We’re working hard to figure out ways to democratize that segment of the investment world. We’re not there yet, but heading in that direction, I believe.
Chris Rising: 37:57 As an active investor with an ESG and an impact focus, how do you compete against ETFs? We’ve seen a world of ESG and Impact that are passive, that are ETFs? Or is this really only in the realm of active investors?
Jeff Gitterman: 38:16 You could definitely do passive ESG. Some things are getting much more thoughtful and better. Some things that are out there are completely green washed and when you have a passive ETF that is only using one day at a provider, under weighting your bottom scores and over weighting your out performance scores on an ESG metrics, to us that has nothing to do with ESG. Not only that, but eventually those underperforming companies will figure out how to game the system and get higher scores and there’ll be a reverse mean on companies delivering alpha at the top score, than becoming companies that deliver some alpha as the bottom scores as they improve and get brought back into the EPS with passive funds. But, some passive funds are doing better work or doing really active engagement with the stocks that they own and that is certainly something that we look at on the passive side.
Jeff Gitterman: 39:18 They’re incorporating more than one set of data risks into their ETF strategies. The new S&P, SG index is more thoughtful and the EWS has a ETF that runs on that index so, there’s more thoughtful stuff coming out there. In our opinion to do ESD really well, you need an active manager right now and it hasn’t trickled down to the passive space yet. The best example of that at all is Pacific gas and electric because most of the passive ETFs owned it, because they had a really good top line ESG score for converting the most number of customers to alternative energy at the quickest pace.
Jeff Gitterman: 39:59 That was because of California regulation and the number of customers in California and the size of the population. But they were also self-disclosing about fire risk in the last two or three years due to droughts in Northern California that were off the chart risks. Active managers to a very, very high percentage avoided Pacific gas electric and all the paths that the STTs owned it. To us, that’s a clear example of why right now ESG has done better inactive strategies.
Chris Rising: 40:29 Has there been anyone who has put together a mutual fund that you would consider a competitor to what you’re doing as an active investor or is it not caught on?
Jeff Gitterman: 40:41 We run portfolios of mutual funds as well as SMA strategies, the portfolio mutual funds are outside managers and we probably diligence, I don’t know, 200 to 300 of the best ESG active mutual funds in the space. Our portfolios hold up against any traditional portfolios. Yes, there are mutual funds that are doing a fantastic job of integrating ESG data and their SMA separate account managers that are trading in individual securities that have done an incredible job as well. There’s a plethora of product out there and that’s a big part of the PowerPoint presentation we do regularly. The products, they are the expertise as they are, especially around a lot of the European companies and head of us for the last 10 years or so. So yeah, the products definitely they are and is thoughtful, returning, you know really strongly as well.
Chris Rising: 41:42 What’s your biggest frustration with the world of ESG and impact investing? What do you feel like you just keep banging your head against the wall or get you flustered bod as it relates to this role?
Jeff Gitterman: 41:59 My biggest frustration is that this world operates by wall street telling a bunch of brokers and advisors what to sell to customers that are, for the most part, not knowledgeable about investing in general. A lot of advisors aren’t knowledgeable about that space either. That regulation around private and impact investing is limited to only high net worth investors which is ridiculous, millennials are going to fight this in a huge way. I expect big changes over the next 10 years in that. The fact that a millennial investor can come in and say, “look, I understand 90% of my portfolio should be in more traditional investments, but I want 10% of my investments on private investments in private equity that drives solutions to the world’s problems” and that they can’t access that because of the net worth?
Jeff Gitterman: 42:57 It’s creating a vacuum in the private equity space that I’m sure you see startups that you know are raising some 25 million or even some five million, can’t find any money. Yet the people that would most likely invest in them, aren’t allowed to invest in them. There’s this gap, it’s called death Valley in the space between people looking to invest in solutions and people that have solutions that can’t be married and these big $1 billion private equity funds that are doing impact, they don’t have the bandwidth to even research or diligence any of those smaller investments. They do a couple of 100 million dollar investments to some other big private equity funds and these startup guys that have brilliant solutions don’t get the money or the exposure. That’s my biggest frustration in the market. And we’re doing work with the UN to try to bring that risk down for lower end investors and make it more accessible.
Chris Rising: 43:55 The jobs act of 14 was supposed to try to address some of that and it’s supposed to lead to a better crowd funding and I’ve seen it made some investments, but it’s always been very baby steps and trying to get… it’s a very paternalistic view of the world that a teacher who is educating our children is told, I’m sorry you can’t take $10,000 and invest in this because we don’t think you’re big enough to understand the risk. I agree that’s got to change.
Jeff Gitterman: 44:25 It’s not just that, they could go down the street and buy a Dunkin donuts with all their life savings. You know what I mean? There’s no restriction around that. They could go to the casino and that all their money. The fact that the investment world is protecting that investor by not letting them buy impact investment ideas is an absurd philosophy.
Chris Rising: 44:51 Yeah, it really is. There’s some big private equity firms that have announced impact strategies. There’s TPG rise, which is on their second fund. KKR, have you looked at any of these funds? Is there anything you have to say about what they’re trying to do and the metrics that they’re holding themselves to or anything on that regard?
Jeff Gitterman: 45:11 No. I’m of the opinion that impact happens with new ideas and these funds while they’re good funds and they’re doing some big work around alternative energy and some things around, recycling and waste that they’ll invest in. To a large degree, those funds won’t get down to the startup world. We get pitched every day ideas, where people are looking for one million, two million, not even half $1 million that are literally like game changing ideas. And granted half of them will fail, but if you could create baskets of them that the average investor could invest in, you know how it works. You only need one or two to be a home run. You could have eight out of 10 fail, one be average and one be a home run and still have the fund be a huge success.
Jeff Gitterman: 46:04 I’d love to see managers really come downstream. There are a couple that we know of that operate on the lower end, but they’re very, very slim pickings right now and that’s where we need the most idea. Back to the late nineties when every other day there was a tech start up and people were just throwing money at them. We need that right now around climate change and societal risk and waste management and environmental issues. We need that environment again.
Chris Rising: 46:34 I agree with you. As you talk to people, what’s the biggest fear you see right now? Here we are in 2020 we’ve been 10 years of the economy going up, jobs continuing. Is there any fear you see out there that maybe isn’t specifically related to ESG? You mentioned the black Swan event of climate change already being named. Anything else out there? As we head into the year that you’re going, I really need to get my clients aware of this.
Jeff Gitterman: 47:06 No, and that’s always the scary thing is that black Swan event. Right now, everything looks so stable, which will probably drive the election. Unfortunately or fortunately depending on your views on that. But everything is really very sanguine right now. Unemployment’s in check, inflation is in check and the economy’s growing at 2%, you know that there is just thought around the fact that 18 the markets took a dive because the interest rates were being raised by the FED and last year the market took off because interest rates were being lowered by the FED and this year it’s pretty clear the FED won’t do anything at all, especially in an election year.
Jeff Gitterman: 47:54 But that also means that if there’s any kind of extreme event, there won’t be much support for the market. Unfortunately, I don’t have a crystal ball around short term events but certainly where the evaluations are in the market right now, we’re a little bit high, we’re not crazily high, but we’re high enough to maybe take some chips off the table right now and just have some cash to actually buy in a short term correction.
Chris Rising: 48:25 We’ve had a great conversation about ESG and impact investing in your firm and everything you’ve done. Can you talk a little bit about your book beyond success and it’s probably well worth reading for our audience, talk about, what was the impetus for writing the book and how it relates to your new television show and your business.
Jeff Gitterman: 48:49 In 2000, I had a point, I grew up, the most money my father ever made in a year was maybe 30,000. All of a sudden in 2000, I had hit this point where I was making the money that I thought would make me feel free and at peace. I didn’t feel free and at peace. I started really digging in and I had a radio show at the time and I was interviewing people that radiated that success that came with just this air of, deep breathing and feeling more free and that was people all over the map. People teaching snowboarding to disabled children, all the way up to billionaires and spiritual teachers.
Jeff Gitterman: 49:36 I just came to the point where we’re constantly looking for something outside of ourselves to tell us that we’ve hit a certain point where we could take a deep breath and everything’s okay. If you’re looking outside yourself for that point and that moment it never comes. Our world especially in America is built to keep feeding that need for more and more and more. My book is about taking a step back and disconnecting from that and finding your value inside, then you can pursue anything on the outside and you can do it and you should do it fully. Then you could find joy in the journey and not be hunting for some destination that is always further out on the horizon.
Chris Rising: 50:22 Oh, that’s terrific. I know it resonates with our audience. There’s a lot of things positive that I say about millennials. A lot of things that get unfairly thrown at them, but in a world where we’re constantly connected, taking that time as you were talking about your personal mission statement and saying, what impact am I really going to have? What am I going to do is really important and it resonates. I find much more with millennials than it does with the boomers. I’ve really enjoyed this.
Jeff Gitterman: 50:53 [inaudible 00:50:54].
Chris Rising: 50:54 Go ahead.
Jeff Gitterman: 50:56 If I could leave you our definition of success in the book is, when you’ve aligned your personal unique expression and service to the world, that’s when you’re truly successful.
Chris Rising: 51:10 That’s great. I have a similar one that was given by a Warren Christopher, former secretary of state who said, “one cannot be truly accomplished unless they help others accomplish”. It’s that same kind of idea. It’s got to be bigger than yourself. Jeff, I really appreciate the conversation. It’s going to be very interesting to our audience. I would point everybody to your new television show on Bloomberg. I’m excited to look at it. I’m sure Bloomberg will put it out in a way that will be easy to consume, so I put everybody there and then you’re booking your movie planetary. Jeff, thank you so much. We’ll put on the website how people can get in touch with you if they so choose and thanks for spending the last 45 minutes with us.
Jeff Gitterman: 51:53 Thank you so much. It was a pleasure.
Chris Rising: 51:55 Thanks Jeff.