So-called responsible investing can take many forms - as many forms as there are values to stand behind. Are you concerned about reducing fossil fuels? What about promoting women in the workplace? Whether you care about those issues or others, there's likely an ESG (environmental, social and corporate governance) fund for you.
You're not alone, either. Investors' hunger for ESG funds and stocks is growing at a rapid clip. According to Deloitte, the percentage of investors who applied ESG principles to at least a quarter of their portfolios grew from 48% in 2017 to 75% in 2019.
There are two main approaches to responsible investing: negative screening and positive screening. In the former, you try to avoid the bad by excluding companies whose values you disagree with; the "sin" industries of tobacco, gambling and guns are frequently separated from the herd. This is how socially responsible investing (SRI) got its start, and it's still a common approach.
Positive screening tries to maximize exposure to companies doing good. This is primarily the realm of ESG funds, which aim to hold stocks with good environmental, social and governance practices. The theory is that ESG-friendly companies won't just make you feel better - they'll perform better, too, thanks to benefits such as cost savings from energy efficiency or better management driven by more diverse leadership.
Here are 15 of the best ESG funds for investors looking to put their money where their values are. Most of these picks, which include mutual funds and exchange-traded funds (ETFs) alike, use a combination of SRI exclusion and ESG inclusion. And they cover the gamut, from global large-cap stocks to small American companies to even bonds that are backed by ESG-friendly companies.
In other words: There's something for just about every need.
Vanguard FTSE Social Index Fund Admiral
Assets under management: $7.3 billion
Dividend yield: 1.6%
Expenses: 0.14%, or $14 on a $10,000 initial investment
The Vanguard FTSE Social Index Fund Admiral (VFTAX, $29.02) is one of the least expensive socially responsible funds available. Morningstar Director Alex Bryan says VFTAX is geared toward "investors who want a broadly diversified portfolio without exposure to firms operating in controversial industries," and that its low fees are "one of its strongest assets."
Vanguard FTSE Social Index Fund uses a passive strategy that tracks the FTSE4Good US Select Index, a market-capitalization-weighted index that screens constituents for ESG criteria.
"Unlike many of its ESG index and actively managed peers, this fund does not directly screen for corporate governance quality or the environmental impact of its holdings, beyond the simple fossil fuels business involvement exclusion," Bryan says. "So, it doesn't restrict itself to exemplary ESG firms."
It does make SRI exclusions, such as firms with significant business ties to tobacco, alcohol, nuclear power, adult entertainment, gambling and fossil fuels, Bryan says. It also nixes companies with human rights, labor, corruption or environmental controversies.
"This cuts out about 30% of the U.S. large-cap market, leaving a well-diversified, market-cap-weighted portfolio that should deliver similar performance to the market over the long term," Bryan says.
iShares MSCI Global Impact ETF
Assets under management: $103.4 million
Dividend yield: 1.4%
Wonder how investing in ESG makes the world a better place? Kostya Etus, director of research at Orion Portfolio Solutions in Omaha, Nebraska, says the iShares MSCI Global Impact ETF (SDG, $64.85) provides an easy answer.
The Global Impact ETF's portfolio is "composed of companies around the world who base their operations to further the United Nations' Sustainable Development Goals," she says. These 17 goals include clean energy, eliminating poverty and hunger, education for all and stopping global warming.
SDG invests in firms that derive at least 50% of their revenue from products and services that address the UN's Sustainable Development Goals. Their stocks are then weighted based on the percentage of revenue they derive from activities related to these themes.
The result is a portfolio of 120 companies from around the world, split 63/37 between large-cap stocks and midsize companies.
The ETF's largest geographical positions are in the U.S. (31%) and Japan (13%). Industrials, health care companies and consumer staples firms each make up about 20% of SDG's assets. Top holdings at the moment include Belgian materials-tech and recycling company Umicore (UMICY), Denmark's Vestas Wind Systems (VWDRY) and Tesla (TSLA).
Parnassus Core Equity Fund Investor
Assets under management: $18.1 billion
Dividend yield: 0.7%
Parnassus Investments has been a source for ESG strategies for People's United Advisors for more than a decade, says Celia Cazayoux, a senior investment manager for the Burlington, Vermont-based wealth management firm.
"From an ESG perspective, the firm believes that quality companies with strong social, environmental and corporate governance practices are better positioned to understand and manage risks, reducing probability of adverse outcomes and controversies," she says.
Parnassus' ESG analysis is coupled with a fundamental analysis that seeks companies that are "high quality investments with wide moats, increasing relevancy, strong management teams with a long-term focus, healthy financials," she says. The result is funds like the Parnassus Core Equity Fund Investor (PRBLX, $44.90), which has delivered a total return of -4.3% year-to-date. That's about 70 basis points (a basis point is one one-hundredth of a percent) better than the S&P 500, and it makes PRBLX a top-quartile performer in its peer group.
"One of the primary drivers for the fund's strong long-term track record is its upside/downside capture," says Cazayoux, who points out that PRBLX has captured 89% of the index's upside compared to 81% of its downside. "The fund's downside protection along with participation in market rallies has enabled it to outperform over the long term with less risk."
Parnassus Mid Cap Fund Investor
Assets under management: $5.1 billion
Dividend yield: 0.5%
The Parnassus Mid Cap Fund Investor (PARMX, $32.17), a Kip 25 selection, is another of the firm's top-rated ESG mutual funds. This solid option for ESG exposure to mid-cap stocks has earned five stars and a Silver rating by Morningstar, and has been lauded for its "talented stock-pickers" and "disciplined, well-executed approach."
The managers' focus on downside protection has resulted in a fund that doesn't always keep up with the Russell MidCap Index in bull markets but has better weathered the few pullbacks of the past decade. To wit, its 9.7% decline year-to-date is a full percentage point better than the index.
Companies are screened for quality and valuation metrics, such as competitive advantages. And no tobacco, alcohol or firearms manufacturers are allowed. PARMX also won't invest in companies engaged in extracting or producing fossil fuels, but may invest in companies that use fossil fuel-based energy.
With less than 50 stocks, the fund can tend toward sector biases -technology is a heavyweight right now, at 25% of assets - but the managers promise not to let the lean of any sector become more than twice that of the Russell MidCap Index.
iShares ESG MSCI USA ETF
Assets under management: $7.3 billion
Dividend yield: 1.4%
The iShares ESG MSCI USA ETF (ESGU, $68.49) is a passively managed ESG fund that tracks the MSCI USA Extended ESG Focus Index. This benchmark takes the MSCI USA Index of large- and mid-cap American companies and whittles it down to "positive" ESG companies by excluding firms in the tobacco or civilian weapons industries, as well as firms that have suffered through "very severe business controversies."
It then maximizes exposure to companies with high ESG intangible value assessment (IVA) scores, which analyze a company's risk exposure to the key ESG issues within its industry. That might include waste production in the food industry, for example, or data security in finance. Every company, regardless of industry, however, is subjected to a corporate governance review.
Bryan says this ESG tilt shouldn't strongly impact long-term performance. So far, that has proven largely true. EGSU has been in the top quartile of its large-blend peers for performance since 2018. Morningstar gives it four stars and a Silver rating, as well as four sustainability globes (out of five).
iShares ESG MSCI EM ETF
Assets under management: $3.2 billion
Dividend yield: 3.1%
The fund world also allows you to invest responsibly across other parts of the globe, too.
For instance, the iShares ESG MSCI EM ETF (ESGE, $30.23) provides exposure to emerging markets, and it works similarly to ESGU. It tracks the MSCI Emerging Markets Extended ESG Focus Index, which takes a broader MSCI EM index and excludes tobacco/firearms companies, as well as those involved in "severe" controversies, then maximizes exposure to high ESG IVA scores.
The remaining portfolio of about 300 stocks is most heavily weighted in China (39%), Taiwan (13%) and South Korea (12%), which is common in emerging-markets funds. While financials are the top sector holding at 23% of the fund, ESGE's biggest weights go to stocks such as Chinese e-commerce giant Alibaba (BABA) and internet/gaming company Tencent (TCEHY), as well as chipmaker Taiwan Semiconductor (TSM).
Fees, while more expensive than EGSU, are still low at just 0.25% annually.
iShares ESG MSCI EAFE ETF
Assets under management: $2 billion
Dividend yield: 3.0%
If you want international diversification but emerging markets feel too risky, you can invest in the developed world via the iShares ESG MSCI EAFE ETF (ESGD, $59.17).
This predominantly large-cap fund, which also has about 15% mid-cap exposure, invests in the developed nations of Europe, Australasia and the Far East (EAFE). ESGD uses similar exclusions and optimizations as ESGU and ESGE to arrive at a portfolio of about 480 stocks.
This isn't a perfectly balanced fund, sector-wise, but it does provide access to all 11 sectors, with industrials (16%) and financials (13%) leading the way. It's also top-heavy, geographically speaking. More than a quarter of the fund's assets are invested in Japanese stocks, with another 14% in the U.K., 11% in France and 10% in Switzerland. However, no single company makes up more than 3% of the portfolio.
Mega-cap consumer names such as Nestle (NSRGY) and Roche Holdings (RHHBY) help fuel a healthy dividend yield of roughly 3%. Morningstar gives the fund four stars, as well as four sustainability globes.
iShares Global Clean Energy ETF
Assets under management: $643.3 million
Dividend yield: 1.3%
Some investors might home in on specific ESG issues, such as clean energy. That has led to the creation of benchmarks such as the S&P Global Clean Energy Index, which tracks a tight group of 30 of the largest clean energy companies from the 11,000-plus stocks in the S&P Global Broad Market Index.
The world is in the midst of a long-term trend that has seen solar and wind power generation rapidly expand, and coal and oil generation decline. The Global Clean Energy Index has been reflecting that trend, climbing 21% since the start of 2016 while the S&P Energy Select Sector Index has declined by 34%. That includes a nearly 2% gain in clean energy in 2020, versus a 35% loss for the traditional-energy index.
The iShares Global Clean Energy ETF (ICLN, 11.89) allows you to track that index for 0.46% annually. ICLN's holdings are spread across about a dozen countries, with American firms dominating at 39% of assets (China's the closest after that, at more than 10%). Top holdings include the likes of clean-energy tech company Enphase Energy (ENPH), solar panel maker First Solar (FSLR) and China's Xinyi Solar Holdings.
The prospectus does warn investors that clean energy companies can be highly dependent on government subsidies and contracts. Likewise, political events and seasonal weather conditions can impact performance.
SPDR S&P 500 Fossil Fuel Reserves Free ETF
Assets under management: $545 million
Dividend yield: 1.7%
Another way to invest with clean-energy principles in mind is to simply exclude fossil fuels from your portfolio.
That's what you get with the SPDR S&P 500 Fossil Fuel Reserves Free ETF (SPYX, $75.21), which simply invests in the S&P 500, minus companies that own fossil fuel reserves (i.e., sources of crude oil, natural gas and thermal coal).
The S&P 500 Fossil Fuel Free Index identifies 481 S&P 500 companies that meet the fossil fuel reserve-free criteria, and SPYX holds 479 of them. Unsurprisingly, there's no exposure to the energy sector here, which means no Exxon Mobil (XOM) or Chevron (CVX).
This isn't just a feel-good investment for clean-energy advocates. SPYX has also delivered 47 basis points of outperformance against the S&P 500 on a total-return basis. And it has consistently outperformed the U.S. large blend category since inception in 2015.
Morningstar gives SPYX four stars and four sustainability globes.
Pax Ellevate Global Women's Leadership Fund
Assets under management: $492.7 million
Dividend yield: 1.8%
PXWEX's performance suggests it works, too. This portfolio of more than 400 gender-diverse companies outperformed 93% of its global equity peers within the Lipper Global Multi-Cap Core category in the five years ending March 31, 2020.
The fund is tied to the Impax Global Women's Leadership Index. To create the index, the firm's in-house Gender Analytics Team evaluates 1,600 global companies for criteria such as the representation of women in management and gender pay equality.
"These factors are given different weights, with representation by women on boards and in management receiving the highest weights," Portfolio Manager Barbara Browning says. The stocks that meet these and certain ESG criteria represent what Impax believes are the best companies in the world for advancing gender equality and women in the workplace, she says.
The fund can tilt "toward higher-rated gender leadership sectors, regions and countries," such as consumer staples and financials, and the United States and France, Portfolio Manager Scott LaBreche says. "(This) can cause negative short-term return impacts," but he says they "are negated over longer-term periods."
Nuveen ESG Large-Cap Value ETF
Assets under management: $200.2 million
Dividend yield: $1.7%
"Value stocks have some of the most attractive valuations right now, particularly relative to growth stocks," Orion Portfolio Solutions' Kostya Etus says. "But there is risk of purchasing lower-quality companies which may go out of business - also known as 'catching a falling knife.'"
By pairing value with ESG companies, which are generally higher-quality and "better able to weather the storm in periods of market stress," according to Etus, you can mitigate the risk of grabbing the blade.
And that's the idea behind Nuveen ESG Large-Cap Value ETF (NULV, $27.86).
Nuveen ESG Large-Cap Value Fund tracks the TIAA ESG USA Large-Cap Value Index, which tries to increase exposure to MSCI USA Value Index components with positive ESG factors while reducing carbon exposure. The ESG value index has outperformed the traditional value index every year since 2015. NULV has done a fair job of tagging along, outperforming the index by almost 0.5% over its lifetime.
Nuveen ESG Small-Cap ETF
Assets under management: $254.4 million
Dividend yield: 1.1%
Speaking of "catching a falling knife," Etus says small-cap stocks can provide strong value opportunities right now, though you face a higher risk of getting cut, especially in the current environment.
Small caps tend to be undervalued relative to large companies, but "many small companies may not make it through these rough economic times," she says. "Having an ESG overlay helps select higher quality small-cap companies which may have a higher probability to make it out of the recession and outperform on the rebound."
She points to the Nuveen ESG Small-Cap ETF (NUSC, $26.49), which tracks the TIAA ESG USA Small-Cap Index, which applies ESG criteria to the MSCI USA Small Cap Index. The 640-holding portfolio is thickest in information technology stocks (18%), health care stocks (15%), and industrials (15%), but it offers exposure to every sector - which isn't necessarily a win, depending on what your ESG values are.
For instance, NUSC does better at avoiding tobacco and civilian firearms (of which it holds none) than it does fossil fuels (1.9% of assets are in oil/gas producers, and another 1.6% are in fuel-fired utilities) and deforestation (1.4% of investments are in "deforestation-risk" companies). That's according to a fund tracker powered by As You Sow, a nonprofit promoting environmental and social corporate responsibility through shareholder advocacy.
NUSC is decidedly not a good pick for investors who prioritize gender equality or want to avoid exposure to military weapons, according to As You Sow's ratings.
TIAA-CREF Core Impact Bond Fund
Assets under management: $5.2 billion
SEC yield: 1.7%
Investors can also add an ESG element to the fixed-income portion of their portfolio.
The TIAA-CREF Core Impact Bond Fund (TSBRX, $10.76) is led by a three-person portfolio management team that includes Stephen Liberatore, head of ESG/Impact fixed income strategy. The fund holds investment-grade bonds from companies that are ESG leaders within their industry and/or have direct and measurable environmental or social impact in areas like natural resources, renewable energy and affordable housing.
The managers start by selecting securities that score in the top half of their peer group for ESG characteristics. Sector specialists then choose from these the individual bonds for the portfolio. These can include U.S. government securities, corporate bonds or mortgage- and other asset-backed securities. As of March 31, 2020, TSBRX as most heavily invested in corporate bonds (49%), with large holdings of securitized debt (22%) and government bonds (18%).
What sets this bond fund apart from its ESG peers is that it may allocate 30% to 40% of its assets to impact investments - "which may fall outside the screen but have a 'direct and measurable' impact on social or environmental improvement" - apart from those chosen through its core screening process. Morningstar Associate Director Brian Moriarity notes this may include smaller, illiquid deals, but management is careful to offset the higher risk of these investments by holding an equal amount of U.S. Treasuries with the same duration.
iShares ESG USD Corporate Bond ETF
Assets under management: $178.1 million
SEC yield: 2.4%
The iShares ESG USD Corporate Bond ETF (SUSC, $27.18) is another fixed-income ESG fund that's specifically geared toward corporate debt. Its aim is to optimize exposure to ESG criteria while matching the risk-return characteristics of the Bloomberg Barclays US Corporate Index.
SUSC's tracking index, the Bloomberg Barclays MSCI US Corporate ESG Focus Index, frowns upon civilian firearm producers and retailers, weapons makers, fossil fuel producers or power generators, and a few other industries. Some of the exclusions are categorical, while others are based on revenue or revenue-percentage thresholds. It also excludes companies tagged with the "severe business controversy" mark.
The overall portfolio is almost entirely investment-grade in nature, though most of its holdings are closer to the lower end of that spectrum. Nearly half the portfolio is in BBB-rated bonds, and another 38% are in A-rated bonds. Effective duration is 7.7, which implies that a one-percentage-point increase in interest rates would result in a 7.7% decline for the portfolio.
The iShares ESG USD Corporate Bond ETF came to life in July 2017, so it doesn't have much of a track record, but it underperformed the category average by 29 basis points in 2018 and outperformed by 155 bps in 2019. It's ahead by 97 basis points so far this year. Thus, SUSC shows you don't have to forgo returns for social responsibility in fixed income.
Walden Balanced Fund
Assets under management: $155.2 million
Dividend yield: 1.0%
Investors can even get access to a balanced fund that prioritizes ESG values.
The Walden Balanced Fund (WSBFX, $19.55) aims for a 70% to 80% equity allocation, and it was at the lower end of that as of the end of April. At 29% fixed-income exposure, it boasted about twice the allocation to bonds of the category average.
The fixed-income portfolio consists of U.S. government and government-related bonds, corporate bonds, municipal bonds and cash and cash equivalents. On the equities side, while the fund managers are open to companies of all sizes, they prefer large caps, with recognizable names like Microsoft, Apple and Google parent Alphabet (GOOGL) topping the list.
The managers apply an ESG screen to holdings and exclude companies with significant exposure to products or services such as alcohol production, coal mining, factory farming, tobacco, weapons and prison operations. They also avoid companies with poor workplace conditions or shoddy corporate governance, as well as those that have a negative environmental or community impact.
Walden is recognized as an asset manager with a history of engaging companies on the issue of deforestation and tobacco in the entertainment industry. WSBFX gets the trifecta of five stars, five sustainability globes and a Gold rating from Morningstar.
Copyright 2020 The Kiplinger Washington Editors