ETF Expert Corner
Etho Capital’s Conor Platt Discusses Socially Responsible Investing
April 4th, 2017 by ETF Store Staff
Conor Platt, Co-Founder & CEO of Etho Capital, spotlights the Etho Climate Leadership U.S. ETF (ETHO) and discusses the growing appeal of socially responsible investing.
You can listen to our interview with Conor Platt by using the above media player or enjoy a full transcription of the interview below.
Nate Geraci: The ETF we're spotlighting this week is the Etho Climate Leadership U.S. ETF, ticker symbol ETHO, and joining us via phone from Pittsburgh to discuss this ETF is the Co-Founder and CEO of Etho Capital, Conor Platt. Conor, great to have you on the program today.
Conor Platt: Hey. Happy to be here. Hi Nate, hi Conor.
Nate Geraci: Conor - before we talk about the ETF, I thought we might first talk a little bit about your company, Etho Capital. I know socially responsible investing is sort of the centerpiece of the firm's overall philosophy. Tell us a little bit about the backstory here.
Conor Platt: Sure. So Etho Capital, as you mentioned, Pittsburgh-based firm. Nate, sorry that both our teams couldn't win their home openers yesterday. So, yeah, we basically have created a process where we integrate sustainability and financial performance. It is a combination of really a whole team, but it was started by myself and my background is financial investment management. Started on Wall Street at Morgan Stanley in New York in a series of roles. I went back to business school at Carnegie Mellon and then worked at Brown Brothers Harriman in the portfolio strategy group, again in New York. And then I started my own firm Confluence Capital around 2009 and run a series of absolute return performance vehicles mixed with hedge funds and market exposure. About three years ago, I met a gentleman named Ian Monroe who's a lecturer at Stanford on Climate Science. Between the two of us, we came up with a way to integrate sustainability and generate performance. We built a series of indices, one of which underlies the current ETF. About 16 months ago, that ETF launched and the rest is history. The index itself is that integration of what we would say companies that have lower impact on the environment or take their impact seriously and really focus on operational efficiency, and I know we'll talk more about that in this discussion, but they want to be good stakeholders. That means good employers, good with the community, and they hold their reputations in high regards and in governance. Of course, you couple all of that with the financials that everybody in the financial community uses. That's the index.
Nate Geraci: Conor, you mentioned the term "sustainability" a couple of times. For someone listening to this program who maybe isn't familiar with sustainable investing or socially responsible investing, generally speaking, how do you define this?
Conor Platt: There's an increased effort to define it, which has just created more acronyms and probably just confused more people, but I think when you look at whether it's the constituents of the ETHO index or really a lot of other products, you'll see the types of companies. But when you think of companies, I sort of define it as companies that don't, in the long run, kill their customers or their employees. So things like tobacco, things like aerospace and defense, the defense side of it. And then on the other end of the spectrum, companies that you think in the long term, at least from Etho's perspective, have limited economic growth from an equity perspective and also have an adverse effect on climate. So things like traditional oil and gas, natural gas, coal. We take it to a level beyond that where really anything in the traditional energy sector is removed from our index. But other people take an approach where they take the most efficient or the least bad energy company and that might be a low carbon approach. And then governance is something that I think the spectrum of investors use whether they're sustainable or socially responsible, whatever label you'd like to use, but governance usually revolves around how the company board is structured, what are the pay incentives, increasingly what's the ratio between CEO pay and median pay, diversity, those sorts of topics.
Nate Geraci: From an investor’s perspective, do you think the rationale for socially responsible investing stems from investors wanting to do the right thing or do you think investors believe socially responsible companies may actually generate better risk-adjusted returns? Or is it a combination of the two?
Conor Platt: I'll speak from Etho's perspective, then maybe go through history. From Etho's perspective, the reason we decided to launch this and do this was that we firmly believe that the performance was there and you could do this. I think, historically, people believed both - but it was more the former of wanting to do good and hoping things would follow along. The good news is that what's happened is that those intentions have culminated in a series of datasets, whether they be from a diversity standpoint, but more importantly from Etho's perspective, we look at a lot of datasets involving supply chains and really looking at company's impact at their supply chain versus their peers. That's a really great way of ferreting out which companies are the most efficient and well run within their industries. If you use that as a lens and kind of go deeper on all the normal financial work you would do, which is readily available, essentially we want to think about the evolution of social responsible investing, more sustainable investing. We think it will just be more investing, that people will need to account for a fuller set of data for their investments. And so I kind of think about it as more complete investing, and that's what we see. I'm very proud to report, and while it's not that long, the index has outperformed the broad markets since inception and in almost every time period. It's partially because it's a combination, and I think this is a key aspect of what you're seeing in both our products, but also others, that there's a lot of work - it's sort of a two-step process. There's a lot of work done on defining what a high quality, sustainable company would be from financial, environmental, social, and governance standpoints of view. And then from there, it's the implementation of that group of companies. In the ETF there's a particular implementation. We use an equally-weighted approach. In other approaches we use a more active risk-oriented approach, but it's still that two-step process that you have this great pull of candidates that's very diverse and then how you implement them.
Nate Geraci: Our guest today is Conor Platt, co-founder and CEO of Etho Capital. Conor, you've mentioned your index several times. Let's talk about the Etho Climate Leadership U.S. ETF. Again, ticker symbol ETHO. This was actually the first broad-based socially responsible and fossil free ETF with no exposure to the energy sector. Tell us more about this ETF. How is it constructed and what's the end investment goal here?
Conor Platt: The end investment goal is twofold: to deliver a broad exposure of sustainable companies and to deliver performance. In an ETF package, as always, you're delivering it at a good price and easy. Right? It's super easy to own a broad, diverse company. As we talked about, we really spend a lot of time on datasets related to operational efficiency. We do that across a global dataset of companies and then take an approach of looking for the best companies within each industry. And then from there take a deeper dive on the financials, the stakeholder engagement, and the governance. Along the way,we also consult a group - a series of NGOs and experts on a series of sustainable topics to look at companies that, while they may pass all our tests, what else might be wrong? And then from there, once that process is done and that's an annual process, we then implement the group of companies in an equally-weighted fashion. So we invest in each company equally and then let the market do what it will. The logic is that we're getting a very broad group of high-quality, great companies and we'll let the market sort out their fates. What you see over time is that that's actually a really great way to implement in terms of performance if you compare a market cap weighted S&P 500 versus an equally-weighted - and for the ETF users at home SPY versus RSP are the tickers. You'll see over long periods of time that equally weighting tends to outperform market cap weighting. There's lots of good reasons for that. In sustainable investing, equally weighting is important for another reason, which is that we produce a broad set of companies, but we know that no company is perfect. We have pretty high standards at Etho, and essentially in an equally-weighted capacity if we needed to, we could eliminate a company and not have a dramatically adverse effect on the remaining part of the index. If we market cap weight it, it would be very difficult. Then thirdly, it's just a really straightforward way of implementing and it works.
Nate Geraci: Conor - you mention "identifying the best companies" and, as I understand it, that's really identifying the most carbon-efficient companies. Companies with lower greenhouse gas emissions. Do I have that right?
Conor Platt: That's correct. So the carbon emissions from both their company and supply chain levels. So that's the nuance. It goes beyond just the activities at the company but, you know, using Apple as an example, which is obviously a part of our index and is a sustainable company, but they have an immense supply chain which some people have issues with, but nonetheless this is basically how about 70 to 80% of the companies in the S&P 500 work across a series of sectors is that it's very supply chain driven. And that's one of the big features that we're looking at is the carbon efficiency of that extended supply chain.
Nate Geraci: And then the other aspect here, just so I'm clear, is that the index removes unsustainable industries or companies. Companies involved in tobacco, defense, gambling, energy, any unsustainable industries. Is that accurate?
Conor Platt: That's correct. And then there are some one-offs, although every year we look at this and Walmart is doing a good job of improving their carbon footprint each year. They still have some bigger issues in terms of labor practices and so there are one-off companies that are eliminated each year, and we have those posted online. So happy to make that available.
Nate Geraci: Again, our guest today is Conor Platt, co-founder and CEO of Etho Capital. We're spotlighting the Etho Climate Leadership U.S. ETF. ticker symbol ETHO. Conor, I came across a recent ESG survey from StateStreet. They noted one of the most important ESG factors that concerns investors right now is climate change. And so I do think this is an area where ETF providers are beginning to focus more attention and we've certainly seen some other ETFs come to market that look to invest in companies with a low carbon footprint. I'm curious, just high level, what differentiates your ETF and what do you think are some of the key factors investors should consider when looking at socially responsible ETFs as a whole.
Conor Platt: Sure. Well, number one when looking at products - there's a lot of products coming to market, which is a good thing, but you need to be sure that it's diverse and most of the sort of low carbon or that it's not narrowly focused, number one, so that you can invest appropriately. Secondly, look at the holdings. Does it make sense to you? Does it make sense that you own XYZ company if this is your goal? I think maybe that simple check is key when you look at the ETHO index. I think the thing that differentiates us is that we view our audience and investors as people who read the food labels and go a bit deeper and they hold us to a higher standard. So we look at the names of the company and our goal is to produce this performance and exposure, but also in a way that if you looked at the holdings you wouldn't have any big issue with them. And there are a lot of them which is what you need as an investor. I think increasingly the ESG/ETF world is getting all the benefits of the traditional world whether it be smart beta implementation or other implementations. We've seen a lot of different products. What's differentiated ETHO thus far has been our performance. The index has outperformed all of the products since our inception by a pretty wide margin. It's because the construction is very broad based. We do not take the traditional index approach. We are not trying to recreate the S&P 500 or some world index which is a lot of what other products do. There's nothing necessarily wrong with that. That's what they're meant to do, but at Etho we knew that for sustainable investing to be mainstream, it needs to be investing. It needs to be associated with performance and delivering what you say you’re going to deliver, and thus far we've been able to do that. The way we've been able to do that is take that multi-cap approach, use deep datasets, and then implement in this equally-weighted manner.
Conor Kelly: Conor, it's Conor Kelly. When you, Nate, and I first met back at the Inside ETFs conference in January, one of the overriding themes of that entire conference was ESG investing and how important socially responsible investing is, especially to millennials, plus the massive transfer of wealth that's going to happen in this country from baby boomers to largely millennials over the next 10, 15 years. What do you think ESG investing looks like 5, 10, 15 years down the road from now?
Conor Platt: I think, as you mentioned, that conference, it was pleasantly surprising to see what a theme it was throughout the conference. I think that's the biggest ETF conference in the country if I'm not mistaken. I think it's pretty good that in between 5 and 10 years, it just looks like investing. That it just becomes…that it's different themes. I mean, the thing about sustainable investing is how sustainable you want to be, right? And, increasingly, whether it's Etho or anything else, there's increasingly an ability to customize your exposures and tools are being made available to advisors. I think some of the key aspects that have happened in the last 12 months that are key is adoption or things like the Inside ETFs conference saying, "Hey, this is a big deal". But more importantly, things like 12 months ago, I believe now Morningstar introduced a rating system and there are several others in the works. MSCI has a rating system for funds, ETFs and mutual funds, groups like Fossilfreefunds.org, you can look there and get different levels of sustainability. So there's more and more tools being made available and the proliferation of product has one really big benefit, which is that advisors are going to be able to buy a full exposure - so a mix of US, international, so, you know, hopefully ETHO's in these mixes, but a mix of ETHO and many other groups to create a full regular exposure that any investor would be happy to have, right? So these trends are moving quite quickly, and we're happy to be a part of it, and we're proud to be a leader. So, yeah, I think it just gets bigger and as products are introduced, they continue to perform as advertised or in line with markets. Investors are happy to make good returns and feel good, too, right?
Nate Geraci: Conor, with that, we're going to have to leave it there. Excellent spotlight today. I do think this topic of socially responsible investing is one that it's only becoming a great focus for investors. It sounds like your firm is certainly sitting in the right place. Best of luck to you and thanks again for joining us on the program today.
Conor Platt: Thanks guys. Take care. All right bye.
Nate Geraci: That was Conor Platt, Co-founder and CEO of Etho Capital. Again, the ETF is the Etho Climate Leadership US ETF ticker symbol ETHO, and you can learn more about this ETF by visiting EthoETF.com.