Sustainable investing has been smashing records in the United States this year. The estimated net flows had reached $20.9 billion in just the first six months alone, which nearly equals to the amount of new money invested in sustainable investing in 2019. Assets managed with environmental, social and governance (ESG) concerns continue to surge this year, even as the pandemic ravages businesses across the globe.
According to the Forum for Sustainable and Responsible Investment’s 2020 trends report, assets under management for ESG investment that includes both institutional and retail grew 42% to $17.1 trillion so far this year, up from $12 trillion in 2018. Sustainable investment now represents 33% of the $51.4 trillion in total U.S. assets now under professional management.
Even before the pandemic, companies were gradually adopting ESG guidelines. In fact, the Paris climate accord, adopted in 2016, had sensitized more investors and asset managers to think about sustainable investing. Several fund managers have now adopted ESG integration approaches in their investment decision that refers to the systematic and consistent accounting of ESG risks and opportunities before making investment decisions. However, the commitments and approaches may vary from manager to manager.
Recently, Joe Biden also pledged that the United States will be rejoining the Paris Climate Agreement on the first day of his office as President, and announced his climate team on Dec 19. Climate or the environmental aspect plays a crucial role in the ESG criteria and this move is a sharp change from the Trump administration’s support for the energy sector.
Additionally, in the coming year a clear generational trend led by the millennial investors will play a crucial role in boosting sustainable investing. This cohort will focus on sustainable investing more and not go against their beliefs, even if other investments have theoretically higher returns. And why not? ESG issues like income inequality, diversity and inclusion, social injustice, employee welfare and climate change have been core beliefs of millennials.
3 ESG Funds to Buy
Given such positive stance, we have selected three sustainability-focused mutual funds. All of these funds carry a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy). In addition, the minimum initial investment for these funds is within $5,000.
We expect these funds to outperform their peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance but also on the likely future success of the fund.
The question here is why should investors consider mutual funds? Reduced transaction costs and diversification of portfolio without several commission charges that are associated with stock purchases are primarily the reasons why one should be parking money in mutual funds (read more: Mutual Funds: Advantages, Disadvantages, and How They Make Investors Money).
New Alternatives Fund Class A NALFX seeks long-term capital growth with income as its secondary objective. It primarily invests in common stocks of companies and even in other equity securities, such as real estate investment trusts and American Depository Receipts.
This Zacks sector – Other –product has a history of positive total returns for more than 10 years. Specifically, NALFX has three and five-year returns of 17.9% and 17%, respectively. To see how this fund performed compared to its category, and other 1 and 2 Ranked Mutual Funds, please click here.
NALFX, a Zacks Mutual Fund Rank #1 fund, has an annual expense ratio of 1.08% compared with the category average of 1.28%. NALFX invests in companies that contribute to a sustainable environment and its top ESG stock holdings are Brookfield Renewable Energy, Terraform Power and Nextera Energy.
Fidelity Select Environment and Alternative Energy Portfolio FSLEX fund aims for capital growth. This Zacks Mutual Fund Rank #2 fund invests the majority of its assets in securities of companies mostly engaged in activities related to alternative and renewable energy, energy efficiency, pollution control, water infrastructure, waste and recycling technologies or other environmental support services. The non-diversified fund invests in U.S. and non-U.S. issuers alike.
This Zacks sector – Other – has a history of positive total returns for more than 10 years. Specifically, FSLEX has three and five-year returns of 3.4% and 9.5%, respectively. To see how this fund performed compared to its category, and other 1 and 2 Ranked Mutual Funds, please click here.
FSLEX has an annual expense ratio of 0.85%, which is below the category average of 1.04%. The fund’s top ESG stock holdings are Procter & Gamble, Microsoft and BlackRock.
Calvert Equity Fund Class A CSIEX aims for growth of capital through investment in stocks, which offers opportunities for potential capital appreciation. This Zacks Mutual Fund Rank #2 fund invests majority of its assets in common stocks of companies that rank among the top 1,000 U.S.-listed companies.
This Zacks Large Cap Growth product has a history of positive total returns for more than 10 years. Specifically, CSIEX has three and five-year returns of 18.2% and 15%, respectively. To see how this fund performed compared to its category, and other 1 and 2 Ranked Mutual Funds, please click here.
CSIEX has an annual expense ratio of 0.99% compared with the category average of 1.04%. The fund’s top ESG stock holdings are Microsoft, Thermo Fisher Scientific and Google.
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