#383 David Rae – Transcript

Ben Nash
Hey guys, Ben Nash from the Ensombl team. And today I’m here with Dave Rae. Dave’s a financial advisor at Ethinvest. He’s also a certified responsible investment advisor, and CFP super passionate in the ethical and impact investing space. So keen to get the lay of the land and some practical tips on how you actually roll this out in a business. Dave, great to have you here, mate.

David Rae
Thanks, Ben, really good to be joining you today.

Ben Nash
And I thought a good place to start is just the your journey and how you ended up where you are and doing what you’re doing today.

David Rae
Yeah, good place to start. I suppose if I go right back to my original interest in the whole world of investment and finance, it came through school and being interested in economics. good at maths, I had a grandfather who pretty early on, shared his, I guess, lifelong passion with with investing. So, you know, the value in investing in shares was sort of instilled in my teenage years, I guess, through my grandfather, and I sort of fell into economics post school where I wasn’t really sure what I wanted to do. Accounting sort of seemed like a good way to get a good understanding of the finances of business and happened to be there, myself and cadetship at one of the big four accounting firms, or wouldn’t say accounting. And auditing in particular was something that ended up as a as a passion, but Dave, but it gave me a really good grounding, I think in terms of understanding the background of what’s going on in a business, both from a financial sense, but also, I guess, when you really get into it, thinking about the planning for the future, although, where I found myself in audit was, and the reason that I didn’t last a really long time, there was, I always felt like it was backwards, looking, you know, you come into a company, and they’ve already done the accounts for the previous financial year, and you’re just looking to make sure that they’re, they’re correct. And they, you know, they haven’t been hiding anything, and everything’s, everything’s ticked off and accounted for. So, I felt like I wanted to do something that was going to be a little more present, I guess, in terms of, you know, the, the role. So I moved into funds management for a period of time starting in an accounting role, and then into our investment team. But I sort of landed in a in a more of a quant based role and spent my days looking at spreadsheets, and not to sort of derive too much the people who are passionate about that kind of thing. But I found that, spending my days, using little cups and, and those kinds of things wasn’t wasn’t really for me, either. So while I was there, I started studying a grad dip in financial planning, because I thought that as I learned a little bit about it, and got to meet some, you know, a couple of mentors in the industry, who, who really sort of explained what financial planning was, this is back in the early 2000s. It sounded like something that that resonated with me a lot more in terms of what I was looking for, in that it was, you know, you’re looking ahead, and you’re planning with clients, and you’re also dealing with people when you’re looking at problems or, or issues they might have or, or goals they might have in the area, and you’re really sort of working with them to to come up with something together. And so that was back. So 2003 was was really the start of the financial planning journey then.

Ben Nash
And so you’ve been an advisor for those 20 years now. What have been some of the biggest changes in what you do as an advisor over that time?

David Rae
Yeah, look, there’s been there’s been plenty, I guess, that’s probably a common reaction to say it’s been a constant state of change, really, in financial advice in that in that time, and if I think back to when I started, that the statement of advice was, was coming in. But it was pretty simple as a pretty simple document. And certainly the compliance requirements around what you had to document in your files and and records of conversations with clients were a lot less than they were today. So, you know, I think it goes without saying we’ve all seen the compliance requirements that have come in and over time, and I think they’ve, I’ve got no doubt that’s, that’s been for the, for the better, we’ve seen the benefit of what’s happened as a, as a profession. By increasing the requirements, you know, I think we can probably accept that they’ve gone a little bit bit too far, in some respects, but they definitely had to move along way from there. I think I’ve seen as well, an evolution in, in the investing piece, too. So, you know, very much when I came, became an advisor, active investing was, was a big piece of what was going on. And I think for most advisors, active investing was the approach that they took, throughout, I guess, the GFC. And, and the years following that, you know, there’s been the growth of, of active investment, and then ETFs. And then more recently, I guess, big growth and level of interest in, you know, the ethical investing piece. And it’s, you know, that that part’s grown, I think from advisors who specialize in ethical investing, to really over the last, probably five years or so, you know, a lot more advisors are starting to bring it into their existing business without necessarily been the core focus of what they’re doing. But But starting to have those conversations with clients. And yeah, that that evolution that for me is probably that piece has been happening for the last seven or eight is now saying that as a as a profession, you know, more and more advisors are having those conversations with their clients, too.

Ben Nash
Yeah, absolutely. And you probably know the stats better than I do. But there’s a huge amount of interest in volume going into the the ethical space. How has that? How did that journey start for you? Because I know that like, now you’re working with FMS, and, you know, doing a lot of work in the ethical investing and impact investing space? Can you unpack that in a bit more detail? But how did that? How did you get into that? And, you know, how did that progression sort of work for you?

David Rae
Yeah, really interesting question. So there’s probably seven, probably eight years ago now that I was as an as an investor, for clients, taking more of an index or core satellite approach to things. And there was so three things that happened around the same period of time that that sort of piqued my interest and change the way that I discussed it with, with clients. So I had a couple of clients around the same time actually fill out their fact find question that. I admit, in retrospect, that I wasn’t really good at exploring exploring with clients, we had one simple question that just said, Do you have any environmental social governance issues around the way you invest your money, anything you’d rather not invest in? And I didn’t really explore that, that properly with with clients I, at various times, it probably perpetuated the, the myth of if you want to invest that way, you know, it’ll probably cost you from an investment returns point of view. But a couple of clients at the same time had actually just more of their own accord than then through good questioning, I must admit, came back and said I’d rather avoid investing in a few particular areas. So that was one thing. I also read an article about in the funeral review around it was titled something like the new philanthropists. And it included the way that some I guess some younger people who had found their sort of family foundations were investing their capital, and specifically around impact investment. And the comment that really struck a chord with me was that to invest in a way that’s got an environmental or social positive outcome to it doesn’t necessarily mean you have to give up financial returns. So that made me think well, you know, what does that mean? And I started to do a bit of research on that, and you know, sort of happy to explore that further. If it if we go down that path, but the other one as well was, you know, like a lot of people I was doing Things like, you know, Movember and dry July and, and the like and raising money for cancer charities or other good purposes. But I also looked at my portfolio, my own personal portfolio, and when hanging on my global equity portfolios to investing in tobacco companies, and these kinds of things, so I’m kind of raising some, some money to try and help solve these problems or help people that are dealing with the outcomes, or the bad things these companies are doing. But I’m still investing my money in there. So that sort of led me to thinking about my own personal portfolio as well. And so these things then led me to go well, particularly from the client perspective, if a couple of clients are saying, I don’t want to invest in those things, well, how am I going to deal with that, and at that point I hadn’t. So it led me to looking at trying to educate myself a little bit better starting to look a bit more closely at the APL that we had, you know, how can I deal with a portfolio that’s going to cater to these client preferences? Yeah, so you know, that initial piece, you know, that eight years ago, was really then starting to understand how I could then put something in place for a client. And you know, there was a big education piece there to make sure that I could come to the conversation with a client with the knowledge that I was able to offer something for them, and not just sort of come up with a, you know, a model or a piecemeal approach to it.

Ben Nash
One of the things that you mentioned there, that is something that we hear a bit from clients as a push back, and I suppose, particularly in the current environment, where we’ve got these massive resources boom, and, you know, resources. And fossil fuel mining in particular is a really common one I’ve found for our young clients that they are, you know, more keen to avoid, or when you talk to someone that is looking to avoid things in their investment portfolio, fossil fuels is one of the common things that comes up. We’ve got this resources boom happening at the moment where all those companies are massively increasing in value. How do you deal with that sort of pushback or objection or conversation with clients around, you know, the potential for them sacrificing returns, or the situation where ethical portfolios are underperforming non ethical portfolios, like what we’re experiencing at the moment?

David Rae
Yeah, look, it’s certainly been, it’s probably the most common question over the years. And for the reasons you’ve just outlined, it’s even more common. Now. So the way I’ve always positioned that with clients is is there is a lot of research around the Responsible Investment Association, amongst many others puts out research regularly to show that over the longer term, you should be able to expect that a responsible or ethical portfolio should deliver returns, at least in line with traditional portfolios that you don’t have to sacrifice returns to invest in this way. Now, anytime that you invest in a portfolio that varies from the benchmark, you’re gonna have short term periods of time that you may underperform, or Alternatively, Alternatively, you may outperform as well. And so, if you’ve had a portfolio that’s more heavily weighted in technology, you’ve probably seen something similar recently, after years of outperformance So, but to address the fossil fuel question, specifically, you know, I’ll always talk about it prior to giving clients advice that you should expect in the short term that we will have periods of time where you will underperform or outperform. We put it in our statement of advice as well. So that, you know, we put it, you know, make sure that that risk is really clear to clients that these kinds of things will happen. And, you know, in the last 12 months, you know, 2022 in particular, it wasn’t just fossil fuels that the technology piece was a factor as well, because if we talk about investing ethically, a big part of that is, is around sustainable technologies. And you know, that might be energy or transport, agriculture, food, alternative materials, so there is a bit of a technology but also you often will have a higher weight to healthcare. So there’s that some of those sectors weren’t performing quite as well, too. So yeah, look, there’s no question. It was a challenging year for for ethical investors, it’s a conversation where we’re heading with with clients. In the main, the accepting that it is a year where that’s happened. But it’s not something that we’re seeing pushback on to say, look, you know, I’m not happy, I want to rebalance back towards the benchmark. Because I think the flip side of it too, is that what we’re seeing is a lot of investment starting to go towards the alternatives to fossil fuels. So we’ve, we’ve, since the change in government in Australia, since the inflation Reduction Act in the US, and a lot of big investors around the world are accelerating their investment in alternatives to fossil fuels. So, you know, we’re saying that while there might be a short term underperformance that, you know, we should start to see a bit of tailwind in terms of the investment into the sectors that they should benefit from, you know, over this this coming decade.

Ben Nash
Or maybe look, Twiggy Forrest jumping on the bandwagon. And that’s something I wasn’t expecting to see. So it’s sort of like that is the changes is it works.

David Rae
Yeah, we’ve created some colorful language recently to

Ben Nash
date, Can you unpack for us the difference between ethical investing and impact investing?

David Rae
Yeah, look, it’s one of the, you know, I guess, you know, as financial advisors, we’re used to dealing with acronyms and terms that can be confusing for clients. So you know, this is a perfect example of that. So the, the responsible investment in association has a really good sort of spectrum of spectrum that they put together, they call it the responsible investing spectrum. And I guess we often some of the terms are used interchangeably. So whether it’s responsible investing, or ethical investing, or sustainable investing, some of the key areas of those different approaches are things like a starting point, if you think about your traditional investments, where you invest in everything, and I guess, a good example of that is just investing in, in the index, you’ll invest in every company, potentially, or most of the companies that are on the on the listed markets, if you then start going down the spectrum ESG investing is really about taking your environmental, social, and governance factors into account. Now, it doesn’t necessarily mean you change your portfolio. But because you might look at a one fund manager might look at an ESG factor and say, okay, where we’re taking the risks of this company into an account into account, it could be, say, it’s a tobacco company, as an example. We understand the risks that are there, but we’ll still invest in that company, once we understand that ESG risks. So ESG approaches can really vary from, you know, not too much change into a portfolio in a portfolio to being a bit more, I guess, active in excluding things from there, which sort of goes into the next piece around an exclusionary approach where a manager might focus on the companies that they want to avoid investing in. So start with the full investment universe, but say, we’re not going to invest in things that are causing harm. So it might be alcohol, tobacco, gambling, fossil fuels, and that might be either a 100% exclusion on those sectors, or they may have a threshold under which they’ll not invest. And that could be, say, a 5%, revenue threshold in those particular sectors, then you start to move into sort of more positive styles of investing. And it might be around positive screens or sustainable themed investments. And that’s where you’re really looking at what are the companies that have a positive aspect to what they’re doing things like health care, things like education. Some that might be aligned to particular framework so they might be aligned to a positive UN framework in what they’re doing? And then we get down to impact investing and if that’s where you’re really looking at companies that have at their sort of core mission, or purpose of what they’re doing is a is an is an outcome that is aligned with positive environmental law or social purpose. So typically, I’ll explain that in, in the way that a company is trying to solve a really big problem, you know, one of the big problems that the world faces, you know, whether that’s dirty energy, or whether it’s electric vehicles, it might be in a plastics around an alternative material, to plastics that use oils that can be put in the compost after its use. So the impact investment pays this sort of few nuances around measuring what the impact of a portfolio is, and that kind of thing. But in in essence, the starting point is, is companies that have their sole reason for being is social or environmental purpose of their mission. As opposed to that being a sort of a secondary impact to what they’re doing. And one way of thinking about it is, is what, if you look at a particular company is thinking about what the company is doing, versus how a company operates. And I often use Tesla as an example. Because if you think about what the company is doing, is, if you think about electric vehicles, we know that the emissions reductions over time, also a big problem problem compared to internal combustion vehicles. So what the company does is puts into sort of that impact thesis. But if you look at it from more of an ESG angle, and go, how does that company operate? Clearly, there’s some issues around governance, you know, they’re pretty well, well documented. And you could also argue around the environmental piece as well, in terms of the intensity of the materials that the company uses. So I use in our business, we use a framework, which is the ABC framework to sort of like it as a simple takeaway for clients, where, if you think about a traditional portfolio, you know, it may or they, it does cause harm. And then the ABC framework is a stands for avoid harm. B stands for benefit stakeholders, or benefits society, and C stands for contribute to solutions. So we align our investments, whether they’re direct or ETFs, or managed funds, within that framework to make it really easy for clients to align, you know, what they want to be investing in, and what their values are, with what their portfolio looks like. And we often find that once we do that, clients will look at it and go, Okay, I can see that, you know, this percentage of my portfolio is in avoiding harm. But now I really want to be sort of working towards the solution based companies. So I can see that I don’t have as much in areas that I’d like, how can we start to shift a bit more down to that end?

Ben Nash
And practically, how do you work that into conversations with clients? Because I know that that’s something that we found as a challenge. With that, and I know that the power of good question is there. You know, what does it look like along the client journey? And how do you get there? Practically?

David Rae
Yeah, so introduce every first client meeting. And one of the things that I found is, I guess, move from the period of time where I wasn’t doing that, to starting to talk about it. Early on, I was probably selective with the clients that I talked to about it. As I was getting comfortable with having the conversation and raising it, and, and it was probably a bit of a judgment call to think, you know, which clients do I think might be interested in this? Whereas now, I will talk to every client about it, because one of the things that I started to find was that as I became more comfortable with the conversation and raising it, some of the clients that I might have thought weren’t going to be as interested. Sometimes were the ones who it was really of interest to. So the sort of things that I do in that first meeting is, is talk about topical issues. If I’m using a presentation with them, I’ll have a slide where It’s a real easy conversation starter. And it’s just a few pictures around, you know, rooftop solar, an electric vehicle, a big pile of plastic bottles, a picture of a Patagonia ad, which says, is around their sort of reusing and repairing sort of model. It says don’t don’t buy me, you know, which is interesting for a fashion company to say that. And so I find that in using that slide, you know, most clients will sort of identify with at least one of the issues in that slide, because it’s something that they’ve been thinking about themselves. You know, they’ve either they’ve got rooftop solar, and it might be well, you know, why did you do that? You know, was it? Was it just because it was the, the cost calculation you need versus your energy bills, or, you know, looking at the electric vehicle, or the thinking about buying an Eevee? Or thinking about buying a hybrid? You know, why were you doing that? What was the interest, so, that sort of uncovers whether whether it is a value sort of component to it, as opposed to just a sort of a, a pure cost benefit analysis on a on a consumer purchase? And, you know, these things that are happening around us on a regular basis, this is on based in Canberra, but not, you know, I think we’re generally pretty sort of separate to what’s going on politically, even though we’re in Canberra, but because there’s things that are happening in terms of policy are a bit more prominent now around things like, you know, carbon offsets, or, or in, you know, we’ve got in the ICT government, he’s going through a periodic phase out of single use plastics. So these are the sorts of topics that come up with clients, probably the most. I guess. The one that prompted the biggest change, I think, in a number of clients at one time in recent years was posed the bushfires. So I’d had a number of clients that I was talking to about fossil fuel investing, who said that look, I don’t want to invest in, in gambling companies, you know, human rights issues are important, some of those things, but fossil fuels, I’m sort of still on the on the on the sidelines are sort of on the line on that when the bushfires happened at the end of sort of 2019, sending out a communication to clients around that. And, you know, like a lot of the country we had, you know, weeks and weeks of seriously impacted health issues in Canberra, where we’re just blanketed with smoke. A lot of people in Canberra have places down the southern down the south coast, and areas that were really badly affected by the fires, too. When I set the communication out, I had four clients who came back immediately and said, Look, I know you’ve talked about fossil fuel investing before, said, You know, we didn’t want to avoid that. But now, we want to look at that again, and have another conversation around that. And they since divested from fossil fuels. So I think sometimes it’s, it’s important from the point of view of just getting that personal, getting that personal connection, and most clients have it, some, some will say that, you know, there’s nothing, I don’t really care, I just want to get the best return. And that’s fine, you know, we I’m not in a position to say, this is what you should be doing as a client. It’s just uncovering their, their preferences. And I should add to that, as well, that, you know, even in our in our business that, you know, is, is named as investing, you have to call a very core part of what we do. We don’t, the clients that I work with aren’t saying, Look, I’m prepared to give up returns. So it’s really an important conversation now. Around that with them, to make sure that we’re still getting good returns. for them. It’s not about sacrificing that there can be some where you’re in if you’re dealing with a charitable organization or other high net worth, but in the majority of cases, the vast majority, it’s still financial returns alongside the ethical investing as well.

Ben Nash
Totally. And there’s more and more research coming out, which he touched on saying or showing that that doesn’t actually have a measurable impact over over long Determine. It’s just cyclical. And I think that that’s what some, you know, anti ethical investors can point to. But I think that’s true of any sort of class of investments or investment sector as well. Dave, what’s what’s coming up for you in this space? Moving forward from me?

David Rae
Yeah, look, I think we one of the interesting things I’m seeing with both clients and advisors that I talked to, actually, is that sort of a spectrum that I touched on where a lot of the starting point is excluding things, and just getting out of the most harmful sectors. And then sort of moving down a bit of an evolution I guess, as, as clients was, is an educate them over the years, and they get to understand this better, they might be a bit more engaged in politics, or they start to read a bit more about ethical investing, I see that they start to move down towards more sustainable impact in investing. And I think that’s something that, you know, in talking to other advisors, I see as well, it’s certainly an area that that I think, if you think about the startup investing world, one of the interesting phenomenon that’s happened in recent years is that, you know, some of the, the brightest minds in startup world would go into places like Facebook, and Instagram, and Tiktok. And wherever you’re thinking about it in a global sense, you know, 10 years ago, or whatever it was, but you’re starting to say, a lot of, you know, the really the brightest minds, sort of moving into companies that are trying to solve these big problems. So they’re going into, you know, Climate Technology, or they’re going into, you know, biotechnology or alternative food, all these sorts of things. So that’s really exciting. And I think from an advisor point of view, you know, one of the things we do it at invest that I know, not all advisors have access to, but there’s really interesting stuff happening in the wholesale investing space, so in, in venture capital, and private equity, and in green property and green infrastructure around you know, unlisted markets around all of these areas, particularly around in the climate space. But what I’m really hopeful that we’ll start to see and it’s been talked about for a few years is this term of democratizing impact. So bringing these really interesting solutions that that are in the listed space, into the, the retail space for, for clients. And I think that’s what we’re just starting to see now. But I’d love to see, see more of it. I know, there’s a couple of companies that are working in there. So I guess, if I can, you didn’t ask for a call out. But if I can ask for a call out. We don’t talk to advisors who are interested in talk to the fund managers you use. And if this is something of interest, and you know, there’s such fascinating companies that are working in this space that, you know, whether it’s something like, you know, who who gives a crap toilet paper that are in startup? Well, they’re in a venture venture capital fund. Or it’s a Climate Technology Business that, you know, there’s interesting ones that solar business in in Wollongong, that called Sun drive, but it’s got some venture capital backing, that it’s got the most efficient solar panel in the world, you know, these kinds of things that are happening in Australia that are in the venture capital space that only the unlisted investors can get into. But I’d love to see those opportunities come up in either a listed investment company or however they become available for retail investors to use because I think that’s what we’ll start to see is our clients are already you know, doing that, but I think, more broadly, advisors are going to be looking for these kinds of opportunities down the track. So I’m really excited with, I guess, more capital coming into ethical investing, but then pushing more towards the, the solutions end of the spectrum.

Ben Nash
Absolutely. Yeah, it’s I think it’s super interesting in the underlying companies. But I think you’ve also if you look at the progression, just in the way that investors can access these solutions over the last even five years, the progression has been huge and no doubt that will continue. You know, as it becomes more horrible front of mine for our clients and for the general investing public as well. So definitely a space that we can’t ignore and one to watch moving forward. But Dave, thank you so much for sharing your insights made really, really appreciate it and yeah, great, great to see the goals that you guys are kicking.

David Rae
I was really good to, to join you on here. Love the work that you’re doing with the podcast and hearing from other advisors and thanks for the opportunity to to share my story Ben.

Ben Nash
Mate stop you’re making me blush. Cheers Dave and thank you team. We’ll catch you on the next one. Bye for now.