Is ESG investing on your radar yet? That stands for Environmental, Social, and Governance, and it’s a huge trend — particularly among women and millennials — who want to invest in companies they can feel good about.
In this week’s episode, Jean sits down with Nicole Connolly, Head of ESG investing and Portfolio Manager for the Women’s Leadership Fund at Fidelity Investments. She breaks down how we can all put our money where our mouth is when it comes to supporting companies that are doing the right thing. Because, newsflash — we no longer have to choose between doing well financially and making an impact in the world. In fact, you can actually make more money by doing good. Nicole shares how some of the highest-ranking ESG companies outperform the market by around 2% per year, and breaks down how you can get involved, and use ESG as part of your overall investing and retirement strategy. Hint: These companies exist in every sector!
Nicole also talks about the Women’s Leadership Fund at Fidelity Investments, a fund that invests in companies that support future female leaders. She dishes on why more companies today are doing the right thing by society and the world, by being more environmentally conscious, having more women in the C-suite, having more diversity on their boards, and much more. In other words, we can all get returns with a purpose and align our capital and our values in a way that also generates superior returns and is sustainable.
Then, in mailbag, Jean breaks down tax laws for folks with side hustles, and talks about how we can all strike a balance between investing using your head and your heart. Lastly, in thrive, Jean breaks down eight reasons why you might be unhappy at work, and how to fix them.
Jean Chatzky: (00:06)
HerMoney is supported by Fidelity Investments. We want you to demand more from your money, so start by knowing what you own and what you owe. We’ll help you take the next step at Fidelity.com/demandmore. HerMoney comes to you through PRX. Hey everybody, it’s Jean Chatzky. Welcome to HerMoney. If this show sounds a little different, it’s because HerMoney is on field trip this week. We are off-site conducting an interview with Nicole Connelly who runs ESG investing at Fidelity. Now you’ve heard me talking about ESG before. It stands for environmental, social and governance. There is this huge trend and we’ve been hearing a lot of demand for it from our listeners. This huge trend of women in particular, but also millennials, wanting to invest in things that we can feel good about. Wanting to put our money where our mouth is, so to speak, wanting to know that when we buy mutual funds or stocks in particular companies, these companies are doing the right thing by society, by the world. That they’re environmentally conscious, that they’ve got women on boards or in the C-suite, that they are paying attention to the social issues that we care so much about. This is a growing field. Every year we’re seeing more funds emerge in this ESG world. And what’s so amazing is that we’re no longer living in a time where you have to choose between doing well financially and doing good, making an impact. You can actually make more money in many cases by investing by these principles. And so Nicole is with me to tell us all about it. Thanks so much for being with me.
Nicole Connelly: (02:25)
Thanks for having me.
Jean Chatzky: (02:27)
We should tell everybody we’re on a field trip.
Nicole Connelly: (02:30)
Yes, yes, we are in beautiful Arizona, my happy place.
Jean Chatzky: (02:34)
I always thought my happy place was New Jersey, but I might have to get a better definition. For those people who are not in the know. Tell us a little bit about ESG investing. What is it?
Nicole Connelly: (02:51)
Right. Okay. So ESG, as Jean said, stands for environmental, social, and governance. And what we’re really about is aligning your capital with your values, with things that you care about. And we think we can do this in a way to generate sustainable and superior returns. And what we’re talking about is investing in companies that are trying to limit the impact on the environment, investing in companies that are trying to do right by their customers, their employees, their suppliers, the communities they operate in. That’s the “S”. And then investing in companies that have good leadership and good governance. And what that means is companies that have strong boards, independent boards, diverse boards, companies that are trying to align the way the management gets paid with the shareholders, and then companies that are allocating their capital prudently. So hopefully you hear that and you think, gee, that’s just like good business. Right? And so, so often people think about ESG as a way to avoid guns or alcohol or tobacco in my investments. But really ESG is about investing in companies that are embracing sustainability principles so that they can be built to last and outperform over time.
Jean Chatzky: (04:08)
So staying away from guns, staying away from tobacco, I mean those are what we used to call the sin sectors, right?
Nicole Connelly: (04:15)
Jean Chatzky: (04:15)
Or maybe we still do. I came up as a reporter first at Forbes magazine and I remember doing early stories on what we then called socially responsible investing. How’s this different?
Nicole Connelly: (04:29)
Yeah. So the history of ESG goes back to the 60s and the 70s and it actually found its origin in faith-based organizations that said, we do not want to invest in companies that conflict with our morals. So we don’t want to invest in smoking or alcohol drinking, all of that. And that’s where this exclusionary idea came from, where we’re not going to invest in these companies. But it has evolved to being something more about, instead of what are you against, what are you for? And that’s a much more exciting conversation to be had and where I think ESG is going. So away from exclusionary and more about let’s make sure we’re investing in companies that are focused on these drivers as a way to generate out-performance.
Jean Chatzky: (05:18)
When I took a look at these numbers recently, it looks like in 2015 about one in $5 was being invested this way and the number is climbing really fast. I mean, it might be closer to one in $4 now. I know research has shown it’s captured the attention, particularly of women and millennials. Why is that?
Nicole Connelly: (05:41)
Yeah, so we see with the millennials and generation Z that they want to buy products that are organic or sustainable. They want to buy from brands that are sustainable. So I think what we’re seeing now is they want to invest in companies that are sustainable. And when we do our research, we see that when we surveyed PI, our personal investing division, surveyed our retail customers, and we saw that 70% of millennials want to invest in this way, and 80% of women want to invest in this way. So I think that’s why it’s getting momentum, but there’s still this perception that you have to sacrifice performance.
Jean Chatzky: (06:27)
Which you said you don’t and I want to dig into that. Right? So how do you know you don’t have to sacrifice performance?
Nicole Connelly: (06:34)
Yeah. So Fidelity has done a lot of work in this area and we looked back five years and five years is a short amount of time. But that’s one thing about the ESG sector, is that we’re seeing more and more data. And so as we see more and more data, we’ll be able to do longer term analysis. But we looked back five years at the top 1000 companies in the U S and we looked at high ranking ESG companies. So again, companies that are doing well, the way they think about the environment and their employees and the governance, and low ranking ESG companies. So companies that just don’t have good leadership or they’re not really focusing on their employees. And those high ranking ESG companies not only outperformed the low ranking companies, but they outperformed the market over the past five years by close to 2% a year. So to me that says like at the very least you don’t have to sacrifice performance and you could even generate better performance than if you had invested in the market.
Jean Chatzky: (07:35)
I have a new book out called Women with Money.
Nicole Connelly: (07:41)
Yes. I’ve read it. It’s great!
Jean Chatzky: (07:41)
I didn’t pay her to say that.
Nicole Connelly: (07:43)
Recommend it to everybody! Yes.
Jean Chatzky: (07:46)
But one of the things that I learned in researching this book is that an ESG screen can actually protect you from some of the bad stuff.
Nicole Connelly: (07:55)
Jean Chatzky: (07:55)
So if by filtering for bad management practices, by filtering for other problems, it steered around some really dodgy waters. Can you talk about why that works and is that something, I mean, should we all be applying these filters?
Nicole Connelly: (08:17)
So I think ESG can be a very powerful risk management tool. And we’ve done work with Goldman Sachs to look at 26 related ESG controversies. So this would be data breaches. This would be oil spills, mine disasters, product safety issues, and those companies underperformed their peers, that didn’t have ESG issues, by 20 to 30% on a one, two and three year basis. So not only are you losing a lot of money in year one, but you continue to lose money over time. And often people ask, well is it a buying opportunity? So we haven’t seen that it is.
Jean Chatzky: (09:00)
How are you looking at the companies that you sort of are selecting out of this world?
Nicole Connelly: (09:08)
Yeah, so we focus on something called materiality, right? So when we’re looking at these ESG drivers, we’re looking to see, are there going to be material impacts on the financial results, either in the short term or longer term. And so for like an energy company, you might think, how are their emissions, what’s their water use? For a tech company, you’re going to be thinking about data privacy. And so in many ways, this is just fundamental research that Fidelity has been doing for years. And we’re just thinking about what are the material ESG risks and opportunities with these companies and let’s think about it and dig into that.
Jean Chatzky: (09:47)
This seems like a good time to take a break and remind everybody that HerMoney is proudly sponsored by Fidelity Investments. What if you could demand more from your money? What if you could make your savings work as hard as you do and what if that helped you reach your financial goals faster. It all starts with a financial checkup and an understanding of what you own and what you owe. From there, the folks at Fidelity will work with you to evaluate your investment options and different ways to grow your savings. The sorts of ways that we are talking about with Nicole Connolly today. You can get started at Fidelity.com/demandmore now. And now let me take you back to my interview with Nicole Connelly.
Jean Chatzky: (10:33)
As we are all thinking about putting together our own portfolios, where’s the place for ESG? Like where does it fit? Do I say I want to take a quarter of my portfolio and do it this way? Or is this something I just apply across the board and how are people actually using it?
Nicole Connelly: (10:49)
Yeah, so I think the beauty of what I’m talking about with the performance piece, is that it can play a central role in your equity portfolio because you can get access to a diversified portfolio because these are companies that exist in every sector. So that would be number one. And you can either go about it by saying, I’m just going to invest in a diversified ESG portfolio, or I feel really strongly about women’s leadership, or I feel really strongly about the environment and I’m going to focus on funds that are focused on that. And like Fidelity has a Select Environmental Fund. We have a Women’s Leadership Fund.
Jean Chatzky: (11:28)
Let’s talk about that, right? The Women’s Leadership Fund is new.
Nicole Connelly: (11:37)
Jean Chatzky: (11:38)
Where did the idea come from? I know you’ve been helming this.
Nicole Connelly: (11:44)
With the help of a lot of people.
Jean Chatzky: (11:44)
Tell us about it. What is it? What does it do? How is it different?
Nicole Connelly: (11:49)
So the Women’s Leadership Fund is part of our larger ESG product roadmap that aims to deliver return with a purpose. And the purpose in this case is investing in future female leaders and also getting women across all industries, all levels, to thrive in their career.
Jean Chatzky: (12:09)
What qualifies as a woman-led company?
Nicole Connelly: (12:11)
Yes, good question. Okay, so we have three criteria. The first is C-suite leadership. So this would be like Mary Barra leading GM. It would also be like Amy Hood as the CFO of Microsoft. So women that are influential in the C-suite driving strategy and vision of the company. The second criteria is board composition. So does this company have at least 33% of their board represented by women? And we picked 33% because the average for the market’s about 17%. So we really want to put a stake in the ground and say we’re shooting for companies that are forward thinking on board diversity. And then the last piece is diversity initiatives. So looking at companies, we have this diversity framework that Jessica Bayliss here in the room has helped me with. And it’s 23 criteria. It’s gender pay gap, it’s parental leave. It’s are these companies monitoring the year over year progress in the hiring, development, promotion of women? Are they providing unconscious bias training? Are they providing flexible work environments, that kind of thing. So we want to make sure that there’s a philosophy and initiatives backing up their commitment to women’s leadership. So it has to meet one of those three. But the fund, actually half of the fund, meets two of the three criteria. So we’re trying to find companies that meet more and more of the criteria.
Jean Chatzky: (13:31)
How many companies.
Nicole Connelly: (13:32)
So the universe is 700 company large.
Jean Chatzky: (13:37)
Nicole Connelly: (13:37)
So it’s a good universe to fish from, and this is a universe where we have women leaders across tech, healthcare, consumer, industrial companies. So we’re not sacrificing anything because we can find these companies in all sectors. And the universe is only growing. Like a year ago when I did this work, I was still a director of research and I had four kids under six at home. So I was going through 3000 companies in the US during nap time on the weekends and early mornings. And going through filings and investor decks and trying to find where are these companies. And when I did it myself, I found 500 companies and then it’s grown to 700, because you have companies like Amazon adding ingenuity, who was the former CEO of Pepsi to the board. Corie Barry at Best Buy. She was a CFO. She just got promoted to the CEO. So you have companies that are trying to show a commitment and put these talented women into leadership positions. But I do want to talk about the collaboration with the personal investing group at Fidelity because that was a huge piece of this fund came to be. And the women’s squad, that’s kind of falling under Kathy Murphy, under personal investing, and you’ve done a lot of work with them and Lauren L. leading the women’s squad. So they have done research on women over the past few years and they have really tried to dig into what are the challenges and opportunities facing women. Let’s get women to take control of their finances and get them excited about investing. So they found that more than half of women are interested in a fund committed to women’s leadership. It’s about as high as 60% for younger women. And we also know that 30 trillion in wealth is going to be controlled by women in 10 years. And you talked about the gender pay gap in your book and how women make 80 cents on the dollar versus men. And so that wealth number is going to happen because companies are focused on narrowing the gender pay gap and the huge wealth transfer that’s going to happen.
Jean Chatzky: (15:48)
Right. Women are going to inherit twice.
Nicole Connelly: (15:50)
Yes, exactly. So we think there’s really powerful tailwinds for this fund, but the fund was really born out of the work that the personal investing group had done to really understand what women want. And we’re excited to kind of try to meet the needs and the interests of these women investors.
Jean Chatzky: (16:10)
Well you got me.
Nicole Connelly: (16:11)
Yes. Great. We’ve got to get you a tee shirt. We got tee shirts.
Jean Chatzky: (16:14)
I want a tee shirt.
Nicole Connelly: (16:14)
We’re ordering more tee shirts. Yes.
Jean Chatzky: (16:17)
I actually told my financial advisor to buy me some so, I’m in.
Nicole Connelly: (16:21)
Jean Chatzky: (16:23)
Before we wrap up, I actually want to know about you. Four kids under six?
Nicole Connelly: (16:29)
Yes. Guess how I did that? I did that in three years. Guess.
Jean Chatzky: (16:32)
No, I got that.
Nicole Connelly: (16:36)
Jean Chatzky: (16:36)
Nicole Connelly: (16:38)
One set of twins.
Jean Chatzky: (16:40)
One area that lacks women sorely is financial services. I mean you are a bit of a unicorn in running this fund. There not a lot of portfolio managers like you. How did you decide that this was the career for you and how did you get there and what would you tell other young women who think maybe I could do that?
Nicole Connelly: (17:02)
So I was a runner in college. I ran for BC and I liked running because there was this result that you had after the end of every race and you knew exactly how you did. And investing is very similar to that. It doesn’t matter what you look like, it doesn’t matter what your background is. Your results are very measurable and that’s how you move forward in the organization. And yes, Fidelity is in a male dominated industry, but I work with amazing women, women that are constantly cheering each other on. We are an organization that’s hitting diversity and inclusion head on. We are tracking the progress of women in terms of the hiring and development and promotion of women. We have unconscious bias workshops to make sure that everyone is aware of their own unconscious bias. We have strong parental leaves. A number of the dads that I used to manage as a director of research would send me emails saying how amazing it was to take that time with their family. And so we have a culture that helps women thrive. And so that is exciting to be a part of. And then the last part is, I’ve had so many male allies. When I was on maternity leave with my twins, my boss at the time came by with his 12 year old son to give not only my twins a baby present, but the other kids. And talk about a male ally coming into the house with four kids under three at the time. That was brave. And then I’ve had other men who have allowed me to talk about this fund in all of their events. And that’s only given even more momentum to the fund. And so I’ve been very lucky in that way. And Fidelity’s a special place in that way.
Jean Chatzky: (18:47)
To young women who are thinking that they’re not sure about a career in finance. Give me your best sales pitch.
Nicole Connelly: (18:55)
It is a place where, again, results really matter and it’s a career that you can get. I used to say when I managed the research associate program at Fidelity, and I used to say, it’s like getting a PhD in life. You see how the whole world works. You see how everything’s interconnected. I mean, my first week at Fidelity, I was sitting across from the CEO of an energy company, like that was amazing. And so there’s so much responsibility and autonomy at such an early part of your career that I don’t know what other jobs are like that.
Jean Chatzky: (19:31)
It’s funny, I was an analyst too.
Nicole Connelly: (19:34)
Jean Chatzky: (19:34)
I was a research analyst. And I in the very early days was sent out actually to watch a laparoscopic surgery because they were pulling gallbladders out – laparoscopically, for the first time. And one of our companies was investing in it. Becton Dickinson. So yeah, exactly. You get a lot of responsibilities.
Nicole Connelly: (19:55)
Jean Chatzky: (19:58)
Exactly. Well thank you.
Nicole Connelly: (19:59)
Yeah, thanks Jean.
Jean Chatzky: (19:59)
Thanks so much for having this conversation and I hope that we’ll talk again soon.
Nicole Connelly: (20:03)
Exactly and we’ll get you a tee shirt.
Jean Chatzky: (20:04)
All right. Sounds good. Thank you.
Jean Chatzky: (20:06)
And with the magic of technology, we are back in our home studio. Kelly Hultgren is joining me and we’re picking up the conversation as we launch into our mailbag. Hey Kel.
Kelly Hultgren: (20:26)
Jean Chatzky: (20:27)
So what do we have?
Kelly Hultgren: (20:28)
First one for Mel? My partner and I recently both started a side hustle, pottery for me, photography for him. Where and how would you recommend we get up to speed on tax laws for creative side hustles please. Passionate as we are about our pursuits, we are quite aware that we will likely not even come close to breaking even in the first couple of years.
Jean Chatzky: (20:45)
So the tech software programs are perfectly adequate as far as helping you through these. They have built-in systems for managing people who’ve got businesses. The biggest thing that you have to do is keep a paper trail. And that means when you spend money on your side hustle, you want to make sure that you are very, very carefully documenting your expenses. And if you use part of your home to do this side hustle, and plan on taking the home office deduction as a result, you want to make sure that you carefully document and segregate that area as well. So I think that’s really all you need to do. It’s not as complicated as you might think. It’s really a matter of paying attention to your expenses. The final thing that I want to say about this though is that having a side hustle, having income outside of your day job, does give you the ability to make a contribution into a retirement account for self-employed people. And that may be an opportunity that you really want to capitalize on if the side hustle is producing enough income or your day job is producing enough income to give you the opportunity to do that. The one that I turn to most often and the one that I’ve used myself is a SEP IRA. And the reason SEP IRAs can be so powerful is that they allow you to put away up to 25% of your self employment income and that number can go over $50,000 a year. So it can be huge. So document and a self employed retirement plan.
Kelly Hultgren: (22:34)
And good luck with these new pursuits. Mel, if you’re not in our private Facebook group yet, please post your site and your husband’s site on our humblebrag Friday threads because I would love to see your work.
Jean Chatzky: (22:44)
Kelly Hultgren: (22:45)
We’ll do one more from Valentina. As a socially conscious 27 year old woman working in New York City, who was looking to invest beyond my retirement accounts, I’ve been intrigued by companies like Ellevest who just recently opened an impact investing portfolio that supports women led organizations. I’m curious what your thoughts are in this. From an investor perspective, should you always lead with your head or is there a way to strike a balance between your head and your heart?
Jean Chatzky: (23:08)
The nice thing is that you don’t have to choose anymore. When I was a young reporter at Forbes magazine and starting to cover what we then called socially responsible investing, I was very conscious of the fact that you did have to choose, that there was some amount of money that you were probably giving up because you were investing in these sorts of companies. It’s not true anymore. In fact, I write in Women with Money, to a pretty large extent, about the fact that if you want to invest in these impact portfolios, you actually can do just as well if not better as people who are investing in run of the mill sorts of ways. And so I would encourage you to explore the world of impact investing. Take a look at funds under the ESG label, that environmental, social and governance. And governance is basically getting women on boards of companies, getting women into senior positions. That is good.
Kelly Hultgren: (24:19)
Jean Chatzky: (24:19)
That is a good thing to do for the world. And look at the wide array of funds. There are so many more than there used to be. There’s so much research on what makes them better and check out Women with Money and read that section of the book.
Kelly Hultgren: (24:34)
Amazing. Thank you, Jean. And for everyone who has questions that you’d like to hear Jean answer on air, please email them to firstname.lastname@example.org.
Jean Chatzky: (24:43)
Thanks so much. And in today’s Thrive, right now on HerMoney.com we’ve got a popular article that lists eight reasons why you might be unhappy at work and how to fix them. The key here is to explore the real underlying reasons that your job is bringing you down and learn how to be proactive about changing them. You hate your boss. Your coworkers are giving you the cold shoulder. Your to do list is either painfully boring or terrifyingly long. These all sound like very valid reasons to hate your job, but in truth, they are only the surface cause of your misery. So here’s a few examples of how to look at them instead. First, you say you’re bored at work. Maybe the real reason is that your efforts have been unrecognized. The symptoms show up because you feel unmotivated. You seek out diversions to real work, like updating social media or shopping. The solution here is to seek out feedback. If you’re bored at work, it could be because you’re just doing the same thing for too long and you’re ready for a change. Or it could be that you feel like no matter how hard you work, you never get that pat on the back that you deserve. If either is the case, seeking out feedback from your boss can be a great way to end this morale killer. As for the other seven items on the list, well you’re just going to have to go to HerMoney.com to check them out. Thanks so much for joining me today on HerMoney. I want to say a big thank you to Nicole Connelly for sitting down and giving us this great education. You know, I’ve been wanting to do this for a long time so I’m just thrilled that we got into this subject. If you like what you hear, I hope that you’ll subscribe to our show at Apple Podcasts and leave us a review. We love hearing what you think and by the way, while I’m talking about reviews, if you’ve read Women with Money, we could really use some reviews on amazon.com so if you’re taking a minute, go ahead and post one there as well. We also want to thank our sponsor Fidelity. We record this podcast out of CDM Sound Studios. Our music is provided by Track Tribe, and our show comes to you through PRX. Join us next week. We’ll be back with another great guest and we’ll talk soon.