Seeds Investor is a fantastic new technology platform that empowers financial advisors to have values-based conversations with investors and then create custom portfolios. Tune in to hear how Founder and CEO, Zach Conway, created this innovative solution for the ESG investment industry.

Transcript

Dan Carreno, Change Finance:
Welcome to The ESG Update presented by Change Finance. I'm your host, Dan Carreno. I am the Head of Business Development at Change Finance, and we are an ETF provider dedicated to environmental, social, and governance investing. And our mission is to help investors align their portfolios with their values without sacrificing returns. Joining me on the podcast this week is Zach Conway, the Founder, and CEO of Seeds Investor, which is a great new technology platform for financial professionals who want to expand their ESG business.

Zach, of course, I wanted to ask you some questions about what you're doing there at Seeds, because I've been really impressed with what the firm is doing, but first, I wanted to get your perspective on a couple of articles from John Hale at Morningstar, who I often refer to as the Oracle of ESG. I've got a couple of articles here about the continued growth of the sustainable investment industry in 2020 and one about what the incoming Biden administration will mean for the industry. I will summarize these articles and then ask for your feedback on the other side. Sound good and ready to dig in? First article this week, as I mentioned, is from John Hale at Morningstar and is titled “US Investors Continue to Endorse Sustainable Investing.” This is more or less just a report card on how things have been going for the industry so far in 2020. First of all, as far as total fund flows go, as of the end of the third quarter, we're at $30.7 billion in net inflows into sustainable funds. That compares to $21.4 billion in 2019, and mind you, 2019 was a breakout year for sustainable fund flows that were four times greater than any previous year. Specifically, in the third quarter, it was $9.8 billion inflows into sustainable funds, and that now represents about 10% of overall US equity fund flows. Passive funds are dominating by a two to one ratio on a year to date basis. iShares is really dominating as they've taken in $14.5 billion year to date. That's 47% of the overall flows. Finally, the last thing that I'll mention from John Hale is that sustainable equity funds are bucking a trend. Last quarter, US equity funds, in general, witnessed $118 billion in net outflows for the quarter, versus more money coming into sustainable equity funds overall. So they're cutting against the grain.
Let me take a pause there, and Zach, let’s hear your feedback on the state of the industry.   

Zach Conway, Seeds Investor:
I think it's exciting. Because there are more people joining the party and obviously the data that John is referencing there is speaking to that story. I think it's exciting, but also, it’s happening for unfortunate reasons. There's a lot of things happening all at once, and that's part of why ESG and sustainable investing has become part of the national conversation. When California is on fire, and we have these really unfortunate social justice headlines. And obviously, we're in the middle of a global pandemic. So, we have this intersection of things happening, and it’s a wake-up call moment for companies to be in the spotlight, reacting to these issues that affect their consumers and their employees. Investors really are paying attention to corporate behavior, and they're starting to align their dollars with what they perceive as good behavior. That is all happening at the same time that large asset managers are also bringing this into the conventional wisdom. We have the blessing of large asset managers.

The other thing happening is a generational wealth transfer. That's not to say that the previous generation didn't think these issues are important, but it's this inflection point where the previous generation is in dialogue with the next generation. There's wealth in motion and decisions to be made about where that wealth goes and how it's invested. And so I see that the cyclical trend will continue and continue to fuel these inflows. And then the last thing as it relates to what we do at Seeds; I'm new to this party. As a financial advisor by background, this is something that I recognized as something that we were not addressing as advisors only four years ago. It was a missing element to what we did in our business. I think that is generally true for advisors who sit in front of a lot of wealth across this country. All of these things are happening at once. So to your point, as outflows are occurring across equity funds, net inflows are happening as it relates to ESG and sustainable funds right now.

Dan Carreno, Change Finance: 
I hear you. I wish that we lived in a world where investors didn't feel as though they had to pursue this style of investing in order to make a positive impact on the world because we live in some sort of sustainable nirvana, but that is not the world that we live in. That's the way things are. So let’s move on to the next article from John Hale. This is just a quick report card on the performance of sustainable funds in the third quarter. He notes that 73% of sustainable equity funds ranked in the top half of their Morningstar category. The degree of outperformance is a bit more pronounced for index funds, where 25 of 26 ESG-focused index funds outperformed their conventional index fund counterparts. So it seems as though the trend of sustainable investment funds performing well in 2020 is definitely continuing. 

Zach Conway, Seeds Investor: 
Large asset managers are now recognizing and promoting the fact that ESG is a way to understand risk exposures and the long-term viability of companies. The data thankfully, is starting to bear that out. I think people typically say you are limiting energy exposure in a time where energy is getting hurt. It's sort of like, well yes, because they are getting hurt because of fundamental ESG risk exposures. That is part of how we think about this type of investing. Number two, that's not the only reason these funds are outperforming. One of the things that John Hale points out in that report card is that from an attribution perspective, it isn't just about the underweight or zero weight in energy in these funds. It's attributable to other things like stock selection by way of ESG integration. I think that's the important context and a rebuttal to those arguments. 

Dan Carreno, Change Finance: 
I appreciate your feedback there. The last article from John Hale is one titled, "The Biden Administration Will Improve Regulatory Climate for Sustainable Investing.” He points out that, especially in the final year of the Trump administration, we started witnessing some more hostile policies toward ESG. For example, the ruling from the Department of Labor impacting ESG funds in retirement plans that we've talked about on the podcast before. So I won't go into too many details about that.

Additionally, there are some rulings made by the SEC during the Trump Administration, which resulted in a raising of the threshold required for shareholders to file resolutions. That's largely viewed as being hostile towards sustainable and ESG oriented investors. Also, the SEC is not putting their weight behind requiring companies to disclose more relative to things like climate change risks or overall ESG-oriented risks. Hale sees the new administration as a shift in the balance of power and expects there to be a far more favorable regulatory landscape coming up. Zach, any thoughts on that, and where do you see things going with the new administration? 

Zach Conway, Seeds Investor: 
Yeah, it's a fundamental shift. To your point, what the DOL just did right at the end of an administration speaks for itself. I think the only thing that the ruling did was bring back the word pecuniary. It’s a missed opportunity to guide the conversation in this space. ESG is a rising tide that that really can't be stopped. The DOL decided to try to put up sandbags instead of getting on the boat and helping to steer. So a missed opportunity. It added to confusion to the detriment of investors. Before we started Dan, we talked about the fact that Jay Clayton, the head of the SEC, actually resigned today. So, we'll see a shakeup across the board. I think those government actions are important starting points, but I’m not one who believes that government is the solution to all. It helps to be open to the idea and helping investors move in this direction and be able to take action as it relates to this corporate behavior. We need the government to be aligned with that thinking in general, but my feeling is that money talks. If you are choosing as a corporation not to disclose these things, it’s bad for business, and investors are going to tell you that. I think investors are going to make the ultimate decision here about how companies should be reporting on these issues. 

Dan Carreno, Change Finance: 
We've got to keep in mind that these things are already occurring in other countries, like the UK, for example. Multinational companies are going to be generating and disclosing this data anyway. So, with a different makeup on the SEC, it's not going to be a big lift for them to also require it here domestically in the US. I anticipate that we'll see some changes on that front, but let's leave the reports from John Hale there. I do want to just mention to anybody listening if you are not familiar with John Hale on Morningstar, he is a wonderful source of information about the sustainable investment industry, and it’s worth tracking his articles. It’s a great way to stay informed about what's going on.

Let’s transition and talk a little bit more about what you are doing there at Seeds Investor. Before we kind of get into the nitty-gritty of the organization and what you're doing, could you give us a little bit more background on how you got into the industry and how you arrived at founding the company?

Zach Conway, Seeds Investor: 
I'm a financial advisor by background. I help run a wealth advisory firm called Conway Wealth. The short version of this story is that we talk to our existing clients in the wealth business about values and everything else we do from a financial planning standpoint. It's how people make financial decisions. How you choose to educate your children or do what you're doing from a charitable perspective. How you think about gifting. These are all values-based decisions. And we, as financial advisors, are helping to facilitate the plan around those decisions. And so, the impetus and thinking about Seeds was the asset management piece of the financial plan. For some reason, it felt like the exception to that rule. Why doesn't this piece of the plan also take into consideration personal values? Everything else we were doing in our advisory business is. We don't want to be in a position where a client is coming to us to say the tax laws have changed. What are we doing with the Roth IRA conversion this year? It was a wake-up call. Why are we reactionary as it relates to the asset management piece that can be values aligned? We have clients saying they want to move in this direction from an investment perspective. It was a position we didn't like being in. That was the genesis. Thinking about how we start to have these dialogues with clients, understand how values might contextualize the investment portfolio, and then build those portfolios. 

Dan Carreno, Change Finance: 
I think that's great because I've been in the industry long enough to see a litany of people come around and make decisions about what they believe financial advisors need. They then create those solutions and force it on the industry without really knowing. The fact that you have walked the walk and come from a wealth management background is a big differentiator to me. So, let's get into Seeds. Tell me more about the platform what's going on there.   

Zach Conway, Seeds Investor: 
The next piece of this story is us recognizing for ourselves what the problem was. There were really two things. One, how do we have this conversation? How do we actually get in front of a client and talk about values and how those values might play a role in the investment strategy. That was the first problem to solve. Then the second was how can we take those inputs, and in a scalable, efficient way, create a customized output that's aligned with what we just heard in that conversation. So that's what Seeds does as a platform. It's not just an asset management platform to help advisors create custom portfolios. It helps have that dialogue with your client and helps the advisor could fundamentally better understand what is most important to that client and how those things can play a role in the investment process. As a technology tool for the advisor, it's a front end diagnostic, which is really just the framework for that conversation. You can go through that diagnostic process and have that sort of magic moment with your client. I now better understand who you are. I now better understand what's most important to you. And here's the allocation that aligns with what I just heard.

We came to understand this space no more than four years ago, and that's a good timeline for advisors, generally speaking, as it relates to this stuff. So to be able to put this in the hands of an advisor who's recognizing all the things that I said at the beginning, we're talking about how they can get in front of those inflows, deepen their client relationship and have a dialogue in a scalable way. 

Dan Carreno, Change Finance: 
Let's illustrate this for the listeners a little bit more. Let's say that you are a financial advisor who has just signed up for Seeds Investor. You are going through the process with the first client that you're going to utilize the platform with. What does the process look like? What's the first thing you do? The second? Third? Fourth?   

Zach Conway, Seeds Investor: 
I appreciate that you said an existing client. Because I think part of what's missed here is that the demand exists already. The kind of thing we always hear among advisors is that my clients aren't asking for this. I’ll go back to my point about being reactive versus proactive. You're the professional. The client's waiting for you to bring them the best and greatest and most innovative things. It's played out in a way that has surprised even us with existing clients. So, to answer your question, you pull up the platform, enter their basic information, taking them through a 15 to 20-minute conversation using this diagnostic framework. In some cases, you already know, right? Financial goals. Things like risk tolerance. Time horizon. If they're an existing client, you know those already. But then getting to the heart of how they would prioritize what we call earth, people, and corporate integrity issues. They drag and drop on the screen. They prioritize these issues and answer a few questions.

Even if you've been a client for 20 years, we now have a deeper understanding of how you think about these issues. It doesn't matter about political ideology or anything that would make us think that maybe ESG is not for you. We're learning that you should not judge a book by its cover. Because go figure, most people, whatever their political affiliation, care about the earth. They want to know that they're investing in companies that don't make products that hurt people. And they want to know that they're investing in companies that are good to their employees. And so that's what they can see and feel at the end of that diagnostic process. Then hopefully, the assumption is the execution of that portfolio and deploying that. So, we can move the needle in the right direction for that individual client. And, of course, the bigger picture is that we want to move money at scale. As advisors, we’re empowered with this platform. Having these dialogues and uncovering with clients things that they would have done a decade ago had you brought this to them. So that's the journey. The experience happens right on the platform. And of course, you have to talk about performance. Of course, you have to talk about all the other elements of financial planning. But in your next client discussion, you get to pull up how their portfolio is still aligned with them from a values perspective relative to the benchmarks. And that then becomes fundamental to the conversation. You're then talking less about fees. You're talking less about basis points of return. Things that neither side of the table really wants to be talking about to begin with. That's what you're trying to fundamentally alter about the client relationship. It's that client experience between the advisor and client.

Dan Carreno, Change Finance: 
It sounds like a pretty comprehensive platform. We have everything from profiling, a client questionnaire, the portfolio construction process, and then ongoing reporting.

Zach Conway, Seeds Investor: 
You’re able to log into the platform and see what these positions do on an ongoing basis. And you bring that into your quarterly review conversation with your client. And then we're also unwrapping a more specific narrative on impact metrics. So how does this portfolio perform when it comes to a particular issue like pollution relative to the overall universe? Those are the tangible stories that can become meaningful in that dialogue with the client over time. And the last thing, you can do an analysis of an existing allocation to be able to show a side by side. I wouldn't necessarily do this with an existing client, but maybe with a prospective client. You can show them that their advisor maybe hasn't had this dialogue with them about how they can align their values with your investment portfolio. Let's go through this diagnostic, let's drop in your current portfolio, and we'll show you the side by side of how these two things actually perform from an ESG perspective. That part, I think, is pretty powerful. Making the comparison.

Dan Carreno, Change Finance: 
I agree. I'm really glad that you mentioned that. So last question for you. Should anybody want more information about Seeds Investor, where should they go? 

Zach Conway, Seeds Investor: 
You can find us at https://www.seedsinvestor.com/. You can find us on LinkedIn, and feel free to email me directly at zach@seedsinvestor.com.

Dan Carreno, Change Finance: 
Brave man, putting his email out there. I like it. Well, we'll wrap it up there. Zach, I want to thank you for your time and for sharing your perspectives today. If anyone listening wants to find the articles and resources that we discussed during the podcast today, you can always go to www.change-finance.com, and within the podcast library, there will be a transcript for the show today, and all of those links will be included in that transcript. And of course, if you have any questions or feedback for us at Change Finance, you can always get in touch with us through the website. Thank you to those that tuned in, and we will be back soon with another episode of The ESG Update.