Seven Things to Know about ESG and its Role in “Sustainable” Investing

Seven Things to Know about ESG and its Role in “Sustainable” Investing

What is ESG? 

ESG stands for Environmental, Social, and corporate Governance. They represent three categories that are commonly analyzed when looking to invest in a company or a fund. One common phrase that might sound familiar is “aligning your investments with your values.” Many financial advisors and institutions use that phrase to lead into a discussion around an investment portfolio that has incorporated ESG factors. More recently, ESG has been viewed as a material risk factor. Ultimately, this means that regardless of whether the portfolio aligns with your values or not, incorporating ESG may mitigate certain risks within your portfolio. ESG isn’t just for “tree huggers”; it is becoming more and more mainstream as people are looking to utilize it to make a more robust portfolio. 

What is included in ESG?

ESG includes dozens of criteria that fall under the three main categories. Common examples within the Environmental category are climate change vulnerability, emissions & energy use, and raw materials & other resource use. Common examples within the Social category are human capital management & labor practices, employee health & safety, and diversity & inclusion. Common examples within the corporate Governance category are board compensation & structure, executive compensation, and business ethics.

Is there a rating or scoring system to determine how “sustainable” a particular fund is?

Yes. Third-party rating providers include MSCI, Sustainalytics (acquired by Morningstar), Just Capital, Arabesque S-Ray, ISS, S&P Global, and more. Most of these services require paid subscriptions if you really want to dive into the weeds and compare several companies side-by-side and their respective product involvements related to animal testing, for example. One of the easiest ways to get a quick 30,000-foot view is to reference the Morningstar Sustainability Rating of a company or a fund. Historically, Morningstar is known for its five-star rating system, which is focused on financial performance. Their Sustainability Rating system is based on a 5-globe scale instead. A 5-star fund indicates that it has outperformed its peers from a financial return perspective; a 5-globe fund indicates it has outperformed its peers from a sustainability perspective when it is scored using ESG criteria. Usually, a company or fund will receive a score for E, a score for S, and a score for G, and then a blended overall sustainability score. You also may be able to get some ESG information from your financial advisor.  

How can I research or explore socially responsible funds? 

There are many ways to research Environmental, Social, and corporate Governance funds. You can do it by yourself or have a financial advisor knowledgeable about this space help you out. A common way to start is to set a screen to only include ESG funds. For example, let’s say you are looking to invest in a US Large Cap fund. Many brokerages have screeners that allow you to filter out the funds that do not incorporate ESG. At this point, you might have a list of funds that simply have “ESG” in the name of the fund. Just because a fund has ESG in the title doesn’t mean that the fund has the same criteria that you are looking for. Not all ESG funds are the same! A deeper dive can be more tricky. In the case of a fund, you may want to see how the fund scores in the E, S, and G categories as well as an overall sustainability score (see section above). You can also look at the latest holdings report to see what companies the fund owns. This will help you gauge if the fund owns the companies that you want (or don’t want) to invest in. You can also read through the investment objective and prospectus of a fund to get additional information. A statement might be as simple as “The Fund employs a passive management (or “indexing”) approach, investing primarily in large-capitalization U.S. equity securities that exhibit overall growth style characteristics and that satisfy certain environmental, social, and governance (“ESG”) criteria.” The previous statement described was directly from one of Nuveen’s ESG Exchange Traded Funds (ticker: NULG).

What has contributed to the rise in popularity of ESG?

ESG has become more popular due to changing investor preferences, generational differences, and published studies that show returns do not need to be sacrificed by incorporating it into a portfolio (some studies even show outperformance in bull markets and increased downside protection in bear markets). Investors are demanding more from their investments, not just in financial return, but in their societal impact. Generally, younger investors (e.g. Millennials, Gen Z) are applying a more scrutinous lens to their investment portfolios compared to older investors (e.g. Baby Boomers). There are also gender differences: women generally have more interest in ESG than men. Fund companies and money managers are listening. They are incorporating ESG criteria into their investment process not only because investors are asking for it, but also because they believe incorporating ESG into a portfolio can help manage risks.

What is the difference between Sustainability and ESG?

ESG generally falls under the umbrella of sustainable investing. US SIF describes it well: “A key strategy of sustainable and responsible investing is incorporating ESG criteria into investment analysis and portfolio construction across a range of asset classes.” One way to think of it is companies that have high ESG scores are more sustainable, resilient, and therefore (theoretically) will be able to generate superior earnings over time. Of course, superior earnings over time would be reflected by positive portfolio performance.

Can a “big oil” company be included in one of these funds?

Yes. Remember when I mentioned that not all ESG funds are the same? Some funds have a “higher bar” than others. Or some simply have a different approach to inclusion within their fund. For example, one fund, Nuveen’s ESG Large Cap Value ETF (ticker: NULV), includes oilfield services company Baker Hughes and the energy company Valero. It does not include companies like Exxon and Chevron, which are part of the S&P 500 Value Index. Another fund, BlackRock’s iShares ESG Aware MSCI USA ETF (ticker: ESGU), not only includes Baker Hughes and Valero, but in addition, it also owns Exxon, Chevron, ConocoPhillips, and Marathon! Why is this the case? For the most part, these funds start with the same “basket of goods.” In other words, U.S. publicly traded companies. But their processes are different. Nuveen excludes a wave of companies that do not live up to a set of predetermined ESG criteria, then selects the “best-in-class” ESG leaders in their respective sector, and then applies a carbon emissions/intensity screen. When it is all said and done, NULV has fewer “big oil” companies in their portfolio. BlackRock applies business involvement screens to their ESG Aware funds. The five screens they outline are civilian firearms, controversial weapons, oil sands, thermal coal, and tobacco (see definitions here). After applying their screens they still include the aforementioned companies in the fund. Again, not all ESG funds are the same.

– Mitch DeWitt, CFP®, MBA

2021 Investment and Market Outlook Guide for U.S. Expats

2021 Investment and Market Outlook Guide for U.S. Expats

Our In-Depth Look at Markets & Investment Trends

Whether you’re craving analysis of the impact of quantitative easing on the markets in 2020 and how that may continue to unfold in 2021, or you’re curious about the trend that is Electric Vehicles, our experienced team of advisors has authored a breadth of content for U.S. Expats, which is curated in our first-ever comprehensive investment guide. Covering topics like sustainable investing and the trends in the S&P 500, this interactive PDF is meant to be a tool in your arsenal as you approach 2021. 

Wells Fargo Shuts Down International Investing. How Will this Impact U.S. Expats and Expat-Focused Financial Advisors?

Wells Fargo Shuts Down International Investing. How Will this Impact U.S. Expats and Expat-Focused Financial Advisors?

According to a post written on Financial Advisor IQ and Advisorhub, Wells Fargo has decided to shut down its international investing segment of their businesses in order to better focus their offerings. This will directly impact U.S. expats as well as expat-focused financial advisors. While this is a relatively small part of Wells Fargo’s business, it may have a material impact on financial advisors as well as clients abroad.

If I am a U.S. Expat Client, What Is Likely to Happen and What Should I Do?

Usually clients won’t be shuttered overnight, but clients will likely have to transfer their accounts out by a certain date (estimated in the Financial Advisor IQ article to be September 2021, but is not certain). Failure to act may lead to trading restrictions or possibly even account closures. Clients that this impacts will be sent communications, but it is relatively safe to assume if you have a non-U.S. address and are not an active duty U.S. military member or a U.S. government employee, this is highly to affect your investment accounts.

Due diligence should be conducted on investment advisors and brokerage firms that can hold assets for U.S. expats. We wrote a previous blog post that discusses the best brokerage options available for expats. As due diligence is pursued, you will want to consider investment offerings, currency trading choices, and fees across available custodians. When vetting financial advisors you will want to check their educational backgrounds, compliance records, and experience. While we have a conflict of interest in saying this, we believe that expatriate clients are best served by advisors that have a speciality in this area instead of a “generalist”.

I am an Expat Focused Financial Advisor. What Should I Do?

If a significant part of your assets come from international domiciled clients, including expats, it may be time to look for a new home. Wells Fargo is a member of the “Protocol”, making it easier to leave without significant legal issues. It is still best to hire counsel to assure you won’t run into problems as you depart. In looking for new employment, you will want to look at firms that are committed to helping international clients and have a number of custodial options in case of future changes in offerings by brokerage houses. Should you want to have a conversation with us at Walkner Condon, contact Clint Walkner at clint@walknercondon.com.

For more information on our U.S. expat services, please visit our website.

What to Consider Before Moving to Portugal as a US Expat

What to Consider Before Moving to Portugal as a US Expat

Portugal has been a very attractive retirement destination for foreigners for a long time, and I suspect that in places such as the coastal towns of the Algarve, you might wonder whether Portugal was part of the British Commonwealth of Nations, given the abundance of retired Brits. Portugal has grown tremendously in recent years as a popular destination for Americans, too, and the amount of clients that we serve that now call Portugal home has been an undeniably prominent trend recently. 

In this article we’ll explore five topics that every American moving to Portugal, or considering a move, should know. Whether you plan to work, start or continue a business, or retire in Portugal, these are subjects that you may pique your interest, and perhaps invite further conversations with us as you refine your plans to move to Portugal as an expatriate. 

Portugal is H-O-T 

(… and we’re not just talking about the pleasant Mediterranean climate!)

Portugal has long been an expatriate haven, but largely for Europeans. In recent years, however, the growth of the expat population has been rather explosive. In 2018, for example, the Portuguese immigration service (SEF) reported that the number of expats in Portugal grew 13.9% to over 480,000 – a very significant number for a relatively small country. U.S. expats are catching on, too, and there are many reasons to ride the expat wave to Portugal. Some of the legal/immigration and fiscal/tax advantages of Portugal are considered in other sections, but it would be remiss not to lead with the quality of life considerations. A very pleasant climate, a very welcoming and neighborly culture, low crime, affordable health care, great food and wine, and a relatively low cost of living compared to its Western European neighbors all come together to make Portugal a particularly attractive option for expats of all ages. In fact, International Living rated Portugal fifth on its Global Retirement Index, which is based on a study of a comprehensive list of metrics. European neighbors France and Malta came in at eighth and ninth, respectively, making Portugal the top European country on the list.  

Get to Know and Understand the NHR Program

One of the factors that can make Europe a problematic option for expats would be the relatively high taxes that dot the European landscape. Higher income tax rates, wealth cases, inheritance taxes, gift taxes, stamp duties, solidarity taxes, etc. seem to be a daunting fiscal obstacle for expats. Since 2009, Portugal has endeavored to make itself a more attractive option through the Non-Habitual Residence Program, or NHR. It’s not a very apt name, because you have to be a tax resident before you can apply to the NHR program. Participation in the NHR program lasts only up to 10 years, at which point the expat remaining in Portugal would be taxed at Portuguese income tax rates (which can exceed 50% for higher incomes) on their worldwide income. 

If you do opt in the NHR program, most income that is non-Portuguese source income will not be taxed in Portugal. We say “most” for two very important reasons. First, as of March 31, 2020, Portugal started to tax foreign pension income flowing to NHR participants, but only at a rate of 10%. If you have a U.S. pension or IRA and tax distributions, it is very unlikely that you are not paying a higher federal income tax rate than 10%, and the amount you pay in Portuguese income tax on these distributions will produce a foreign tax credit that you can use to directly reduce your U.S. tax liability from this income. Second, and this is where things get rather gray in terms of how Portugal taxes income, it is not clear that all passive income from investments outside of Portugal will not be subject to Portuguese income tax, and opinions, even from accountants, vary on this subject. It is clear that rental income and capital gains from the sale of investment real estate outside of Portugal is not taxed in Portugal. However, income from securities investments (intangible assets) – capital gains, interest, and dividends – may, in fact, be taxed at the standard Portuguese rate in Portugal. You will read many expat sites that state otherwise, but much of the literature is directed at non-U.S. expats (particularly Brits), and it may well be that the specific wording on taxation of dividends and capital gains on intangible property within the income tax treaty between the U.S. and Portugal augers a different, unfavorable outcome. We would encourage you to find and consult with a tax preparer in Portugal to make the final determination on that issue. Either way, the tax treatment of passive income for NHR expats will rate competitively against the tax rates experienced in other developed countries. 

No Wealth Tax in Portugal 

While other countries in Western Europe have conceived new ways to tax their most affluent tax residents based on the level of their affluence (examples include the Swiss Wealth Tax and the Netherlands “Imputed Income” (Box 2) tax), Portugal does not have these types of taxes. However, similar to the French “Impôt sur la Fortune Immobilière” (IFI), which we discussed in this blog post, Portugal recently (2017) has also developed a national property tax on it’s wealthiest property holders. This tax applies only on properties valued above €600,000 for individuals or €1.2 million for property owned jointly by married couples, with annual property tax rates ranging from 0.4% to 1.0%. Of note, unlike the French wealth tax on real property, Portugal’s national property tax applies only to high-value Portuguese real estate and does not apply to properties owned outside of Portugal. 

No Transfer Taxes in Portugal (Sort Of) 

Another differentiator in favor of Portugal is the absence of wealth transfer taxes, which is to say taxation upon the gifting of wealth during one’s lifetime and/or taxation upon inheriting wealth. Western Europe can be a great region of the globe to live, especially given their evolved healthcare systems, but it can be a terrible place to die (or to generously share your prosperity with others beforehand), namely because of their draconian taxation of inheritance and gifts. Since 2004, Portugal became a major exception to that general rule, when it abolished gift and inheritance tax. However, the affluent owner of assets within Portugal should become keenly aware of the stamp duty, which applies to the transfer of Portuguese assets through gifts or by inheritance. The stamp duty applies to transfers to someone other than the owner/decedent’s spouse or lineal descendant (children, grandchildren, etc.) and is imposed at a hefty rate of 10%. Additionally, for income tax purposes, the recipient does not receive a step-up in basis on the gifted or bequeathed property in Portugal, which means potentially significant capital gains

taxes (28% for residents, 25% for non-residents) if the benefactor turns around and sells the Portuguese property. 

Trusts May Surprisingly Work Reasonably Well If You Relocate to Portugal 

First, as a rule, an expat should always have their estate plan reviewed by a local estate planning expert in their prospective country of residence before moving abroad with an incumbent estate plan, particularly if that estate plan has trusts featured within the plan. It is worth emphasizing that most Civil Law countries (of which Portugal is most certainly a member nation with a Roman law heritage) do not recognize trusts and, therefore, trusts usually create legal and tax chaos when applied in a civil law context. 

However, 2015 legal reforms introducing the concept of “fiduciary structures,” and more recent court decisions in Portugal applying these newer laws to trusts have surprisingly led to income tax outcomes on trust distributions that appear much more benign, surprisingly akin to U.S. taxation of trust distributions. For example, these tax decisions have held that ordinary distributions to Portuguese beneficiaries from trust investments receive capital gains treatment (28% tax rate), and no income tax would be assessed upon terminating a trust and distributing its assets to the beneficiaries. In that latter case, only the stamp duties would likely apply to the beneficiary who is not the spouse or lineal descendant of the settlor of the trust. This compares quite favorably in comparison that such distributions would receive in most European civil law jurisdictions (such as France or Germany). With such tolerance for common law structures, perhaps it is not surprising that so many Brits feel very much at home in retirement in Portugal! 

Whether you are already residing in Portugal or contemplating moving to Portugal as a U.S. expat and are looking for someone to help you with wealth management, please feel free to reach out to Walkner Condon Financial Advisors to discuss your specific situation.

Stan Farmer, J.D., CFP®

Five Things to Know For Americans Moving to France

Five Things to Know For Americans Moving to France

The US embassy in Paris estimates that over 150,000 Americans reside in France, and the country remains a popular destination for Americans, both on a temporary and permanent basis. Whether you are making the move for family, professional or lifestyle reasons, there are a number of things to consider before you leave. This short article will cover five important topics that may make France a more ideal place for Americans to settle than its high tax reputation may indicate: income, wealth and inheritance taxes, Assurance Vie and trusts.

Income Tax May Not Be As Bad as You Think

Most people naturally think of France as a typical high-tax western European jurisdiction, with generous social benefits coupled with punitive income tax rates. While this is generally true, the reality is more nuanced for Americans living there. In many ways, France is a bit of a reluctant tax haven for American expats. Certain provisions in the France-USA double taxation treaty allow Americans living in France to effectively exclude a lot of their US-sourced retirement and investment income from French taxation. This is particularly useful for American retirees, who may be able to use treaty benefits to live in France while really only paying US taxes.

No More Wealth Tax

For a long time, France was known as a prominent member of the small group of countries that apply a wealth tax as part of their fiscal arsenal. I still speak to Americans who worry about wealth taxation if they decide to relocate to France. The good news is: France no longer has a wealth tax. Everything changed with the 2018 Macron tax reform, which largely rescinded the wealth tax, but not completely. The traditional French wealth tax was replaced with something called “Impôt sur la Fortune Immobilière” (IFI), which is a tax imposed specifically on real estate wealth. Functioning much like a national property tax, IFI could still represent a significant liability if you happen to be heavily invested in real estate, but for the average American professional or retiree it’s unlikely to amount to any meaningful sums.

Death and Taxes, and Death Taxes

As benign as income and wealth taxation may seem for US expats in France, there is no sugar coating the fact that living in France may expose Americans to the dreaded “droits de successions”, France’s inheritance tax. Compared to US estate tax, French inheritance tax is a completely different beast: while a US estate enjoys an 11.58 million dollar exemption per person, the beneficiary of a French estate only gets a EUR 100,000 exemption in the case of first-degree relatives (children and parents) and likely much less for more distant relations. In the most extreme cases, inheritance tax rates can go up to 60% for transfers to unrelated inheritors. 

Learn What “Assurance Vie” Means

Regardless of your French proficiency level, there are two words you may want to quickly familiarize yourself with if you are considering moving to France: “Assurance vie”. While the term translates literally into “Life Insurance”, a french Assurance Vie has nothing to do with what we would call life insurance in the US. Instead, the Assurance Vie works more like a tax-advantaged retirement account. It’s almost impossible to talk about French financial life without mentioning its most ubiquitous investment vehicle. French residents have collectively squirreled away over 1,656 billion euros in Assurance Vie, representing roughly 40% of total French savings. If you ever walk into a French bank, or interact with any French financial services provider, it’s likely that they will try to sell you an Assurance Vie.  In most cases, these products are not suitable for Americans, so be very careful. A French Assurance Vie will often involve underlying investment in non-US registered mutual funds, which may be taxed punitively in the US (see IRS rules on Passive Foreign Investment Companies, or PFICs, for more information).

Trusts Don’t Travel Well

They just don’t. Over the years we’ve repeated this motto to a number of clients in various parts of the world, but this is especially true in France. In 2011, on the back of the UBS tax evasion scandal, French authorities introduced new regulations aiming to clarify the taxation of foreign trusts. The new set of rules also introduces specific disclosure requirements for anyone involved in any sort of French-connected trust arrangement (broadly defined as any trust having French resident grantor, trustee, beneficiary or holding French situs assets). The new rules eventually led to the creation of a public register of trusts, which included names of settlor, trustee and beneficiary, and was publicly available through the French tax administration website, all in the name of transparency. In 2016, the French constitutional court ruled that the public nature of the trust register violated fundamental rights to privacy, and public access to the register was suspended. While trust data is no longer public, the reporting requirements remain in place, and an American moving to France with a US trust will be required to make certain disclosures to French fiscal authorities, or face hefty fines for non-compliance. The required disclosures include a recurring annual filing, as well as an event-based filing to disclose any changes made to the trust. Beyond disclosure requirements, trying to reconcile US trust provisions with Napoleonic French civil law is likely to feel like the proverbial square peg in a round hole, and could create more problems than it solves. If you plan to move to France and retain existing trust arrangements, be sure to seek legal advice. 

Whether you are already residing in France or contemplating moving there as a U.S. expat and are looking for someone to help you with wealth management, please feel free to reach out to Walkner Condon Financial Advisors to discuss your specific situation.


Syl Michelin