Looking for ESG data and ratings for the municipal bonds? R. Paul Herman, CEO of HIP Investor, has solutions! Paul joins the podcast this week to discuss HIP Investor’s analytics, ratings, and research on municipal bonds.  Paul also provides his perspective on the upcoming election and how the outcome may impact the growing ESG industry. HIP Investor Ratings LLC is a California limited liability company, providing 125,000+ ratings for investors, advisers, fund managers and retirement plans.  R. Paul Herman is a registered representative of  HIP Investor Inc.,  an investment adviser registered in the States of California, Washington, and Illinois, with clients across the USA. This is not an offer of securities. All investing has risks.  Past results are not indicative of future performance. 

Transcript

Dan Carreno, Change Finance:
Welcome to The ESG Update presented by Change Finance. I am your host, Dan Carreno. I'm the head of business development at Change Finance, and we are an ETF provider dedicated to environmental, social, and governance investing. Our mission is to help investors align their portfolios with their values without sacrificing returns. My guest this week is Paul Herman. He is the CEO and Chief Investment Officer at HIP Investor. Paul, I guess I have to start off and say that I'm sure that you're a hip guy. You're probably down with what the kids are into these days, but something tells me that's not what the name of your company is all about.

Paul Herman, HIP Investor:
Well, we can't discount the value of being a hipster about anything, especially about investing, but HIP stands for Human Impact and Profit. So, just like you say, you can achieve an impact without sacrificing returns. It's totally doable to do that.

Dan Carreno, Change Finance:
We are going to speak with Paul about the services offered by HIP Investor, but first, I have asked Paul to provide his perspective on a couple of recent developments in the world of ESG investing. So, Paul, I'll go ahead and summarize a couple of articles here, and I would love to hear your thoughts on the other side. Sound good? All right. The first article that we're going to talk about this week comes from Investment Week, titled “ESG Funds to Hold Most AUM by 2025.” This article is summarizing a report that comes from PwC in Europe. They're tracking fund flows into ESG funds, and based on the trajectory right now, it looks like by 2025, ESG funds will have about 57% of the market share in Europe. Currently, it stands at 15%, so that's a pretty significant jump. They did say that a lot of that growth will come from overhauling core strategies at major asset managers. Paul, to get your perspective, what do you think about that trajectory of growth? And more importantly is, what do you think that's actually going to do to the world once most of the money out there is being managed under ESG guidelines.

Paul Herman, HIP Investor:
This is a really exciting time, and it's a relief because we've had many people say to us that we've been in the first inning of ESG investing for the past 14 years. Maybe we're going to jump from the first inning to the seventh inning and do a lot of catching up. One of the other common themes you'll hear from people who are committed to ESG investing is in the future, ESG investing will just be called investing. If you ask millennials or Gen Z or women today, what creates value in a company, they will tell you all the factors that create value. You need to hire great people. Keep them. Serve customers well. You don't fire your staff, so you can maintain that relationship with the customer. You don't want to overpay your CEO. You want to pay people a fair wage. You want to have a good benefits mix. You don't want to be sued as a company. These are all factors that drive value today. To us, it's very intuitive. We're going to get more of that. The good news is we're going to get more competition on who to invest in and whether they have the best people, whether they treat the planet sustainably, and if they are trustworthy firms. So, yes, it's very exciting.

Dan Carreno, Change Finance:
What do you think about this concept of most of that growth coming from existing asset managers with large funds where they're going to shift from being a traditional fund to having an ESG overlay?

Paul Herman, HIP Investor:
That is the likely path. But here's the challenge. We're living in a time where the bigger you are, the safer you are. Usually, being big hampers your growth and hampers your innovation because innovation really happens in smaller firms. Newer firms like Change Finance, like HIP Investor. The challenge in today's market is big companies like to do business with big companies. If you have a 401k and work for a big company, your 401k is likely with another big company. Not with a smaller, innovative company. So, getting big companies to evolve and move fast takes longer. That allows the space for smaller firms to come in and innovate. That'll be the competition over the next few years. How mobile or agile is the capital of investors? Are they willing to support newer, more innovative strategies from smaller entities? Or will they wait for a good enough ESG strategy from a large entity with whom they're already doing business with?

Dan Carreno, Change Finance:
I think we've already seen some asset managers rebrand existing portfolios, and sometimes they get labeled as ESG aware. What does that really mean? It kind of means nothing. I think a lot of people are discovering that they want some intentionality and some experience behind their ESG portfolio.

Paul Herman, HIP Investor:
That's not very hip. For example, take some funds that call themselves fossil fuel reserves free. The reality is they're not even that. They're not even a hundred percent fossil fuel reserves free. ESG aware. ESG conscious. ESG integrated. It's up to all of us to know who's managing the fund and look inside the fund. It on us to do that research. That's why we not only manage portfolios, but we also produce ratings to say, are the funds, are the stocks are the bonds that you hold really HIP and impactful?

Dan Carreno, Change Finance:
You're jumping ahead on me. Before we get into HIP, I have one more article to get your take on. We are recording here on October 19th. The election is coming up. It's front of mind for everybody, and I have an article here from Financial Advisor Magazine titled, “Biden Election Victory Would Boost ESG Investing.” This is a report on a panel where there were various experts saying that they expect a Biden victory in the election would accelerate the adoption of ESG funds and investment strategies more so than if Trump won reelection. Interesting, right? Because I remember back in 2016, Trump's victory in the election led to a surge of money going into ESG funds as some investors were looking for different avenues to push back against what they perceived as hostile environmental and social policies. I have to get your opinion, Paul.

Paul Herman, HIP Investor:
Well, the best possible scenario is our democracy survives and that we have a government that is of, by, and for the people. One that cares about clean air, clean water, fair pay, and holds lawbreakers accountable. A Biden victory would definitely accelerate the institutions and capital markets and regulatory environment that could do things like mandate disclosures about employees and the environment. And there's this battle in the 401k space about whether ESG is permitted as a factor to use in decision making. So those will be some of the issues to consider in a Trump administration versus a Biden administration. I think what's caught for now is investors allocating their capital to fund managers who are either developing new strategies or rearchitecting existing strategies. To link back to our first question, it is those bigger firms that are doing it. So, we're going to see more in a good way. We're going to see more competition for investor dollars and hopefully do so in a way where the governing institutions help promote transparency, encourage positive performance for people, planet, and trust, which do drive financial value and minimize risk.

Dan Carreno, Change Finance:
Interesting. We'll leave it there. I think this is a good opportunity to transition. Let me start at a high level and ask you about your organization. What is HIP Investor? What are the products and services that you offer?

Paul Herman, HIP Investor:
At HIP, we're 14 years old, so we're a gangly teenager. We've lived through the first stage of ESG for multiple years now. We have three clusters of things that we do. One is we produce and license investment ratings based on people, planet, and trust. This is now known as ESG but historically what we called health, wealth, quality, and trust, which we based on Maslow's Hierarchy of Needs and wrote about in our first book, The HIP Investor, which is now ten years old. We do that for 9,000 stocks, 100,000 bond issuers, including muni bonds, and more than 1,000 funds. Then we manage money and strategies around great places to work, around climate action, and around sustainable real estate. Then something new that we've been doing is helping cities figure out ways to fund their climate action plans. We write about this all the time. We do features with Barron's and with the Financial Times. Our new book is coming out and called The Global Handbook of Impact Investing. It’s 30 chapters of how to be a great impact investor from 50 authors around the world. That'll be out for holidays. So great for a holiday gift.

Dan Carreno, Change Finance:
Excellent. We'll keep an eye out for that. In the way that you mentioned all of this competition coming in the asset management space, it has been difficult not to notice all of the additional competition when it comes to data. There are all kinds of new firms out there thinking of new and innovative ways to evaluate ESG criteria. I see a lot of AI being applied to the space these days. So what are the differentiating factors? What sets HIP apart from the other rating agencies out there?

Paul Herman, HIP Investor:
Great question. The number one thing that sets us apart is that, from the very beginning, we've seen data sets about people, planet, and trust as essential drivers of future risk and potential future return. Many of the other data providers were slow to get there. We built that in from the very beginning, and usually, most things that we pioneer eventually get copied. When I used to work for Ashoka.org, a social entrepreneur organization, that was a factor of success: if you're copied by somebody else. So one is the connection between impact and profit. We see that as quite direct. It's not a hundred percent correlation. It's not a hundred percent of the time, but on average, it's lower risk or higher return in many time periods when you use this type of information. The second thing is customization. We saw 14 years ago that people would want to customize in different ways. So that's what we do today. Some customers want to have their own unique ratio. Some customers want to tilt to some really difficult challenges like biodiversity. There aren't really any biodiversity metrics by company. There are for the world, but not by company. So we can customize across people metrics, planet metrics, and trust metrics. Who’s getting sued by whom is a big one. When you get sued, it’s usually because you've broken some trust. You're either overcharging customers, or you're firing employees of a certain type, you're stealing intellectual property from competitors, or you're harming the environment. Also, when you pick up the phone, and you talk to us, you're going to talk to somebody who does the work. There's not a distinction between salespeople and product people. Finally, we're always a good value. We're not trying to extort people to do good.

Dan Carreno, Change Finance:
Interesting. Just to wrap my head around this, let's say I run an RIA and have a big focus on ESG, but for whatever reason, my clients are particularly focused on private prisons and detention centers. So, we could go to HIP and could work with you to construct data sets and metrics to cater to that specific client base?

Paul Herman, HIP Investor:
Correct. It could be private prisons, or it could be fossil fuels. It could be gender equity. It could be any of those traditional negatives. More often, it's becoming the Sustainable Development Goals that we're supposed to hit in 10 years by 2030. Things like no poverty, life on land, life below water, or even peace. Imagine that, if we would achieve peace. So, there are ways to overweight, underweight, screen, filter, and construct unique, customized metrics for whatever your client is looking for and do that across all asset classes. In equities, bonds, real estate, hedge funds, and private equity.

Dan Carreno, Change Finance:
Let me jump in there. I have a follow up question for you. With all the folks that I speak to on a regular basis, a common gripe is that it's been difficult to get good information on the municipal bond space. So, could you talk a little bit more about how you approach rating municipal bonds and what differentiates you from some of the other rating agencies out there?

Paul Herman, HIP Investor:
Well, first of all, other rating providers don't pay much, if any, attention to muni bonds. The credit rating agencies are starting to do it, but more in corporate bonds than muni bonds. And there are firms like Four Twenty Seven Partners, that just got bought by Moody's, that focus on climate down to the block level. So that's amazing, and I’m definitely excited about that type of innovation, but the challenge in munis, is that there are 115,000 muni bond issuers in the US. There are 50,000 water utilities. There are 16,000 school districts. There are 4,000 hospitals that take Medicare. There are 2000 power plants. And there's data that exists on all of these, but it's not easy to get. Then you've got to snap it all together. Then you have to make sure it's quality checked. Then you need to figure out who your peer groups are. Then you need to create these ratings and pillars and metrics. So, it's a lot of work, and we've done it. As an impact investor, or as an ESG investor, you need to decide, do I just allocate money to entities that are already doing a good job? Of course, we should reward good behavior. But what about those areas that are getting good impact on things like school districts in low-income areas? Maybe they don't have a great credit rating. So, what part of your portfolio might be amenable to slightly lower credit ratings that are helping teach low-income kids? That's a question for investors and advisors, and fund managers. Then another, even more difficult question is when they're in low-income areas, and they're not getting the results. What responsibility do we have, or what portion of your portfolio are you willing to invest, to help those school districts that might need some management changes or might need some infrastructure changes? None of this information is reported in the muni bond document that gets issued with the bonds. There's a lot of reporting on all of this that still has to happen. We're trying to help facilitate more impact reporting from the muni-bond area and attach a higher accomplishment of mission measurement to muni bonds. Some will think all muni bonds are good. Aren't they issued by governments and nonprofits? Sure. But aren't all businesses supposed to be profitable? And they're not. To put a finer point on it, if you had to go to the hospital right now, would you care which hospital you went to? The answer is you would because there are different health outcomes and different patient satisfaction at the 4,000 hospitals that take Medicare around the US. So that's what we bring to the muni market.

Dan Carreno, Change Finance:
Interesting. Suffice to say, it sounds like you guys have invested quite a bit of time and resources into this, and you have a head start on the rest of the market. Last question for you. Number one, are there any new projects or services that you guys are working on at HIP that you would like folks to know about in the financial services space? And if so, how would you like people to get in touch with you and find more information?

Paul Herman, HIP Investor:
You can always find out more about HIP Investor at https://hipinvestor.com/. If you want to understand the methodology behind it, we have The Hip Investor book from 2010 and the new Global Handbook of Impact Investing. That's a way to see and read case studies of how you can do this yourself or how you could do it for your clients.

Dan Carreno, Change Finance:
Fantastic. Well, thank you, Paul. We are going to wrap it up there. If anyone listening wants to find the articles and resources that we discussed during the podcast today, you can go to www.change-finance.com. You can find our podcast library under the INSIGHTS tab, and links will be provided in the podcast transcript. And of course, if you have any questions or feedback for us, you can always get in touch with us through the website. Paul, I want to thank you again for your time and for the work that you're doing there at HIP Investor. We wish you a lot of success and growth going forward. And thank you to the listeners out there for tuning in. We will be back soon with another episode of The ESG Update.