74&W Exclusives


Russell Heller


In the second installment of our 74&W Exclusives series on Sustainable Investing, we spoke with Russell Heller, a Yale undergraduate who manages the University’s Dwight Hall Socially Responsible Investment Fund. He described the challenges of achieving positive impact at small scale, his hopes for how the field of socially-responsible investing will develop, and how his generation thinks differently about money, value and investment.

Let’s start out with a bit of background. What is the Dwight Hall Socially Responsible Investment Fund, and what’s your role there?
I’m co-chair of the board. We manage part of the endowment of an umbrella organization for community service, social activism and volunteering at Yale University. Right now we manage about $150,000 of their endowment – a small portion – in a socially responsible way. Primarily we invest through funds, like mutual funds and ETFs, in public markets. So we’re buying debt and equity in public companies through standard funds with different sort of ESG [Environmental, Social and Governance] screens, sustainable screens. We rebalance the portfolio every year or so. Since we’re not actively managed, it’s more difficult for us to own many individual holdings [because] we can't really keep up with the news on all of them and trade them when major things happen and change in the market. Our largest holding is the KLD index, which is just a passive index that has its own kind of ESG methodology that it uses to include or exclude, positively or negatively weight, companies based on certain factors. We also have a separate portion of the portfolio that’s dedicated towards investing in what we call alternatives, which is primarily REITs and YieldCos. We own a water index. So that’s more thematic-type stuff. And in that portion we own direct stakes in companies. [We’ve done] some community investment stuff where we are working with local nonprofits to help them identify opportunities for investment in solar and energy efficiency in their own offices, and then helping arrange financing for those projects as well.

Anything else?
Yes. Another thing which I think is really cool is we do shareholder engagement. If you own $2,000 worth of a public company for a year, you can file a shareholder proposal with the company. And if it meets the SEC’s requirements, all the shareholders get to vote on the resolution. And then you have lots of dialogue with the company, meetings and phone calls. You get to discuss whatever issue you’re focused on. It’s a way of trying to create change within an existing institution. We bought shares of Exxon-Mobil at the same time as there was a big divestment campaign on campus and it seemed like divestment from fossil fuels wasn’t really going to happen. So we thought, “Why don’t we try engagement as another opportunity to create impact within this space while we’re waiting for divestment to happen? Exxon is not going anywhere. We should buy shares of the company and try and make them in some way better, more responsible.” So we asked them to disclose their lobbying spending. They have a really hypocritical lobbying policy, where they say one thing and then they do another. So we basically were saying, “It’s our money. We’re your investors. Where are you spending our money? Why are you spending our money in a way that doesn’t align with these values that you claim to have?”

A lot of funds say “Sustainable” or “ESG” in their names but they don’t demonstrate to us what that actually means.

What drew you personally to this area of investing?
I’d been really interested in microfinance since I was 13. For my bar mitzvah, someone gave me a little money to lend out [on] a website [that’s] like a crowd-funded micro lending platform. I got super-excited about microfinance and this whole concept of social business. Muhammad Yunnus, the guy who kind of came up with the idea for microfinance, is a personal hero of mine. I started the microfinance club in high school and then I applied for the Dwight Hall Fund and made my way into that and then just got really excited about the Exxon work that we were doing. It’s been my main extracurricular thing that I’m really most excited about, most passionate about, on campus, almost since day one.

How did that early interest in microfinance carry over into what you're doing now?
I’ve always been interested in the intersection between business and how one can create some sort of positive impact. “Impact” is a really terrible term. It doesn’t really mean anything a lot of the time. But you know, “How can I do good in the world?” I really think the private sector’s going to be the source of a lot of the positive change in this time in which we live. Nonprofits are great but so small and can only do so much. And clearly the government right now is not doing a lot of things that maybe some of us would like, on the environment, on social issues, on any number of issues. The private sector, that’s where most of the money is in the world. So many trillions of dollars are constantly being put to use in order to create return. And if you can create some sort of social return in addition to financial return, that’s something that really appeals to me. I always knew that I wanted to do something business-related. But the paradigm in which I grew up was that you make your money and then you give it away later. The idea that you can do both at the same time was really, really, really appealing to me.

One of the keys will be proving that sustainable investment can outperform the market.

How explicit or fixed are the fund’s ESG/impact goals? Are there specific outcomes that you seek, or are such considerations met on sort of a case-by-case basis?
I think it’s more the latter. Our values are constantly in flux [because] people are coming, people are going. The life cycle of a college student is obviously very short. And every group kind of has a different focus, I think. It’s a question that we’re constantly grappling with. We do kind of have to figure [that] out on a case-by-case basis. Like personally, I’m an Environmental Studies major, really interested in energy and the environment. So the “E” is what I think about the most. But that varies. We’re also doing work with Merck, trying to work on drug pricing. And that’s more of [the] “S.” We try and avoid the standard sin stocks like tobacco and alcohol and gambling and weapons manufacturers. But after that, it really varies fund to fund. So I wouldn’t say that we have a fixed view on what it means. It is something that we think very thoughtfully about and constantly are talking about and reflecting on, but we don’t have, like, a two-sentence definition of what it means to us.

What are your fund’s tolerances around financial return versus impact?
We have two buckets within our portfolio. One is market-driven and one is mission-driven. The market-driven side is kind of a value-first approach, where we’re looking to create a solid financial return for Dwight Hall to provide for its operating budget. We want to get reasonable returns so that we can grow the endowment, but definitely do no harm and try to create impact where possible. We’re trying to outperform a 60/40 split of the S&P 500 and the Bloomberg Barclays Aggregate US Bond Index. Right now, a large portion, like 20, 25 percent of our holdings, are in fixed income. And right now, in fixed income, there’s essentially like two or three options that are ESG or SRI [Socially Responsible Investing]. So there’s no good options that exist. And every time we’re rebalancing the portfolio, our values are changing because our options are changing and what we can actually own is changing constantly. Like, we own a PIMCO fund that says it’s ESG, but one of their largest holdings is a loan to an oil company. And we own two other Vanguard things that have no ESG anything, because the last time we rebalanced, there wasn’t anything to even buy. The emerging markets ESG fund [I was just referring to] is brand new. The last time we made the portfolio, it didn’t exist. So our options there are constantly changing and it’s really exciting to see things being launched all the time. So we try and have a positive impact, but it’s primarily focused on returns. We’re not going to buy Shell or whatever for financial return. There is a line. It’s just that there’s so much gray area.

The key is for the bigger players to be as genuine as possible in this, and to stimulate a culture throughout their firms.

The mission-driven side right now is actually only made up of Exxon and Merck because we just reconfigured the whole portfolio. So it’s a very small portion of our total holdings. And those are the two companies that we’re actively engaging with through the shareholder engagement stuff that I was mentioning earlier. But in the past, we’ve had loans to CDFIs. Returns aren’t [even] considered in those decisions that we’re making in that space. It’s just impact. [With] Exxon, there’s no presumption of any sort of positive return for us. That’s just a social return that we’re looking for. We’re just trying to create impact through our engagement there. 

Tell us more about your process for actually selecting the funds/investments that you’re making.
[Some recent Yale graduates] just launched an impact rating service called Real Impact Tracker. We include that in our analysis.

But [a lot of it is just] reading through the prospectus, reading through all of the fact sheets. Taking the available information online. We look at a few things. We look at who the manager is. Is BlackRock managing it? Is it Vanguard? Is it Fidelity? Because there’s a lot of variation there in how much engagement they do, how they use their market power, how much they use their assets under management to create some sort of impact and engage with companies and try and work for some sort of positive change in whatever way that they define. So that’s a component of our analysis, is who the asset manager is. The history of the asset manager, the fund, what the fund’s strategy is, what the fund’s ESG strategy is, what the performance has been. Then we look at the holdings: How are they investing it? What sorts of companies are they owning? What sorts of industries are they including, excluding, positively weighting, negatively weighting? Are they picking the best in class or are they just excluding all fossil fuels or something, for example? And we’re not married to either sort of fund, but these are just the things that we look at. There’s an art and there’s a science, and you kind of just have to sit down and think about how far into which direction in the gray areas you want to be. 

Companies need to make this shift in order to get the talent they want, the consumers they want and the investors they want.

We [also] look at turnover ratio. We like to see, especially for actively managed funds, a low turnover. We like to see high conviction. We like to see asset managers that do shareholder engagement, that are going to be owning a company for five years, for ten years, and working with that company to see some sort of positive change there. So shareholder engagement is key, and that’s one of the reasons that we still even own mutual funds, because ETFs are just way cheaper, often. But we see the impact in the mutual funds often being a lot higher because they're actually making the phone calls and going to the meetings and filing new resolutions and voting proxies in a way that we really like and that we see as much more impactful than just kind of passively owning an index of companies that don’t do the world evil. Because we don’t really see there being impact there. So just owning, whatever, Starbucks instead of Dunkin Donuts because maybe you think Starbucks is the nicer company, that doesn’t do any good. But if you own that company and you engage with that company and you file resolutions and you vote your proxy, that’s where we see a lot of the impact happening.

When it comes to fund selection, what are the biggest challenges that you face?
Actually interpreting whether or not a fund is legitimately going to be impactful and aligned with our values. That’s the big challenge. There’s a lot of funds that say “Sustainable” or “ESG” or whatever in their names, but we don’t know what that actually means, and they don’t demonstrate to us what that actually means. You know, just having “sustainable” or “ESG” in the name of a fund doesn’t mean they do anything positive. Anyone can say they use ESG, because “ESG” can mean anything, right? So it’s seeing that in practice and seeing more than just, “Oh, here’s one anecdote about how we bought a bond that has some sort of positive social impact” [while in] the other 99.9% of [their] holdings, they don’t even care about any of these other factors when they're making investment decisions. So we look for funds that can demonstrate clearly, like, “Here’s our ESG strategy. Here’s how much we care about this factor. Here’s the percentage of our portfolio that’s in these four buckets: energy efficiency, clean materials, blah blah blah.” And they spend time and they put effort into making clear how values-aligned they are in their investment decisions, in addition to having really solid performance. But the real key thing is just knowing that they actually are what they say they are and that they aren’t just saying “ESG” because they want my money but they actually are ESG because they want my money. Those are different things.

We thought, ‘Why don’t we try engagement as another opportunity to create impact?’

Also, the number of funds, especially in the fixed income space, is lacking. There’s the TIAA-CREF Social Choice Bond Fund, which is great, and after that there’s not much that we really like. So just launching more funds in new spaces is a potentially valuable thing. There just needs to be more on the market.

Fees are also a big issue for us. Sometimes it’s harder to justify buying a mutual fund that has much higher fees. Also there’s this trend that we’ve noticed [where] a lot of the ESG and SRI funds will just have higher fees than their counterparts. That’s really frustrating for us. We kind of feel like asset managers are just jacking up prices because they think that investors in these spaces don’t really care. But we do care about fees and we do care about returns. But they get away with [it] right now because there’s so few products on the market that we like.

Are you reliant on the asset managers or third parties for metrics, or do you attempt to measure the impact of your investments yourselves?
Quantifying impact is definitely one of the biggest struggles for us. And it’s hard to quantify the impact of $150,000 invested in a public market with $100 trillion or however much is invested in public equities in the world, right? Since we have such a small amount of money, most of the impact we think we have is through the shareholder engagement that we do. And that’s definitely difficult to measure. We like some of the changes that Exxon’s been making since we started this, but it’s hard to attribute that to what we did versus the fact that the Paris Agreement happened or that Trump got elected. There’s a lot of factors at play. So it’s hard to really attribute what value we’re adding to that concoction.

A lot of the metrics out there, a lot of the impact ratings, all they look at is the holdings. They don’t look at what the actual fund does. Which we see as pretty problematic. Like I was saying before, they can own the best companies, but if they don’t do anything with that? There isn't really a ton of value in buying shares on the secondary market of a company that’s good if you’re just going to silently hold them. That’s not really that impactful. 

Our options are constantly changing. It’s really exciting to see things being launched all the time.

[The third-party metrics that are out there right now are] pretty bad. People only use it because that’s all that exists. And everyone wants something better to come into existence but it just [hasn’t] yet. It’s all garbage. A lot of it, at least. So [we’re] waiting for someone to solve that. No one has.

What hopes and concerns do you have as you see bigger players, like banks, asset managers and institutional investors, enter the space?
I mean, it’s great to see the big names coming in. Obviously that’s exciting. They have so much more firepower and just sort of goodwill, I guess you could say, built up with companies. Companies know, for example, that when [a major bank is] talking with them, [that bank] isn't in there to mess with them and try and get them to do things that are bad for their business. Whereas they might think somebody like Calvert is doing that because Calvert cares more about impact. But on the other end of that, I want [that bank] to care about the impact and not just do it because this is what people like. Like, yeah, “90 percent of millennials want to invest in sustainable products.” But most millennials don’t know anything about investing and most stockbrokers don’t care about this sort of stuff and they're not going to pitch these sorts of things to people, so it’s really hard actually meeting that demand. The key, I think, is [for] the bigger players to be as genuine as possible in this, and to kind of stimulate a culture throughout their own firms. Not [to] have this be just a separate silo within a bank, like, “Oh, yeah, here’s the ESG team or SRI team or whatever, and they’re going to be totally separate.” But to kind of inculcate that as a cultural piece within an entire organization and have everyone understand the value of looking at environmental, social and governance factors and shareholder engagement and things like that. And [to] have it not just be like, “Oh, here, we have one small fund that’s negatively screened, and that’s what we do.” Because that’s not enough. So having that be the value of the entire institution rather than just one subsection is pretty important, I think. 

The paradigm in which I grew up was that you make your money and then you give it away later. The idea that you can do both at the same time was really appealing.

And just making sure that it’s actually real. Because there’s no law against calling something that isn't ESG “ESG.” I know I’ve said that like ten times, but when [a huge asset manager] launches an ESG fund, I don’t think that they’re very impactful and I’m not super-inclined to be buying those products. I’ll buy them, but I’ll buy them hoping that something better is launched in the near future.

What do you think asset managers could be doing better to help funds like yours achieve the impact you desire?
Just better communicating their own impact. Better trying to quantify things. I think it’s great when a fund is saying, “Yeah, we’re this much less carbon per dollar.” I know a lot of that depends on the data that they're getting from companies, which is a whole other question. Like whose responsibility is it to supply these metrics? But just quantifying things in general is great.

Are there any tools or techniques or considerations for achieving impact that you see asset managers or other fund managers neglecting or overlooking right now?
Yeah. I think there’s not enough engagement and proxy voting. Major institutions do a horrible job, in my opinion, of voting their proxies on the environmental resolutions and social resolutions. It’s really unfortunate to see. Like, it was great that BlackRock and Vanguard and State Street voted for that one climate resolution at Exxon this year and one at Occidental Petroleum or whatever. But they still voted against practically every single other one that was up for a vote. So it’s good to see that that’s maybe slowly changing, but we’re far from where we need to be, definitely. And proxy voting is such a low-hanging fruit and it’s so easy. If those major institutions got behind resolutions more often, or even co-filed resolutions, that would just be huge. That would totally change the way companies act, I think, because they just own so many shares. And it’s also just so easy to say, “Here’s our proxy voting policy. Here’s our proxy voting record.” And just put that up online and be very clear about that.

If major institutions got behind resolutions more often, that would totally change the way companies act.

Just to kind of shift gears a little bit before we wrap up, do you think that investors of your generation think differently than prior generations about SRI/impact investing? And if so, how?
Yeah. I mean, I like to think so. I mean, I think this comes back to what I was saying in the beginning. The idea that you can both achieve a solid financial return, or even a market-beating financial return, in addition to some sort of impact? That, as just an idea, is totally new to most people. I talk to my grandpa about this and he just doesn’t even get it. Or it takes him forever to get it and he just says, “Wow. That’s wild that that even exists. Because when I was your age, no one would even think to think that.” I guess delineating generations is difficult, but people under the age of 40 get this a hell of a lot better than the people who are older than that.

Then do you think your nonprofessional peers think about money and value differently than older generations?
Yeah, I definitely think we do. We have this understanding that companies can be good. We are consumers [who] like to choose the companies that we think best align with our values. People are just much more socially aware and just care about what’s going on. People don’t even want to work for companies that they don’t like. So companies need to make this shift, I think, in order to get the talent that they want, the consumers that they want and the investors that they want.

Delineating generations is difficult, but people under the age of 40 get this a hell of a lot better than the people who are older than that.

We’re very idealistic, and that’s really going to affect the way that business is done. [But] every generation is always super-idealistic when they’re 20 or 21 or however old we are. There’s [not much] pressure when you’re a 20-year-old. [You can] say, “Oh, yeah, of course I’ll invest in a way that’s going to have some sort of positive social impact.” But then when you have kids and you’re 35 and you’re like, “Okay, shit. I want to send my kid to college,” you know, these things can obviously change. And the extent to which they do is going to be a major question. It’s fairly easy to say before you’ve even started investing that you like these things. Or like, “I want my university to divest from fossil fuels – but I also want to have financial aid.” And so how my generation deals with the reality of these situations? I have no answer for you on that. It’s hard for me to predict.

What influence do you think your generation is going to have on the financial services industry specifically?
We’re clearly different from prior generations. The studies and the surveys show that we’re more focused on impact and more willing to be creative and to see financial return and impact as not mutually exclusive. But [again], who knows how that’s going to last as people age and as people kind of get to the point where reality bites? But [one of the keys], I think, [will be] proving that you can outperform by using ESG and by looking at long-term factors and taking a long-term view, [proving that] sustainable investment can outperform the market. You have Generation and you have Parnassus, and then after that there’s a lot of question marks. The more of that that can be proven, the more it’ll just be easier for people to say, “Yeah, of course I want to align my values and my investments, because I can make more money [that way].”

If anyone has a good definition of how they define ‘ESG,’ I’d love to see it.

Last question: If you could plot an ideal trajectory for sustainable/impact investing within the broader industry, what would it look like?
The number-one hope is to see that we can outperform the market in the long term. Prov[ing] that [it’s a good idea to own] a company for ten years because you see it as being ahead on some megatrend like climate change or food insecurity. Knowing that those companies – and these strategies – will actually outperform is the number-one thing. Because you’re not going to attract a ton of investment at scale unless people are comfortable with the philosophy as the one to produce returns. If that happens, then it’s going to be way easier to get everything else to happen.

Number two is just quantifying and communicating impact and explaining, you know, “What’s the philosophy and how do we actually see our fund playing into creating a world that’s below 2 degrees Celsius?” Those sorts of things are going to be very important as well. That’s more a question of communication, because explaining that doesn’t require changing the strategy at all. It just requires giving examples and being very clear and genuine. That’s low-hanging fruit and that’s [something] that can be done now. That can obviously improve as companies report more information and there’s more data available, but a lot more can be done now on that.

The returns thing, that’s just going to have to happen over time. [But] there’s a lot of positive data and momentum in that space already.


Russell Heller is a Junior at Yale University, pursuing a degree in Environmental Studies with a concentration in Sustainable Business. He is a board co-chair of the undergraduate-run Dwight Hall Socially Responsible Investment Fund, where he leads shareholder engagement efforts and founded a community investment initiative.  He also hosts a weekly radio show on the Yale Radio station, WYBCx.

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