Make your portfolio a tool for social change.
As interest in investing for social change has grown over the years, so have the number of low-cost options. Many more exchange-traded funds are investing with environmental, social and governance (ESG) factors in mind and producing “an equity market rate of return,” says Ethan Powell, founder and president of Impact Shares. “People now want to be more intentional with their money.” To be sure that ESG is central to the investment process and not just an afterthought, study the fund’s selection methodology, adds Anna-Marie Wascher, chief executive officer and founder of Flat World Partners, which helps clients construct socially responsible portfolios. Or, use some of the funds profiled here as portfolio building blocks.
NuShares ESG Small-Cap ETF (NUSC)
One of a few issuers with an entire suite of funds aimed at social change, Nuveen uses the same socially responsible methodology for all products, including NUSC. It selects companies based on their exposure to and management of ESG-related risks and opportunities, including whether the firm is involved in controversial businesses such as tobacco or weapons. Unique to Nuveen is an additional carbon screen for eliminating companies that own fossil fuel reserves. NUSC, a U.S. small-cap blend ETF, is based on the MSCI USA Small Cap Index. At 23 percent, financials are the fund’s top sector holding, but with 724 holdings overall, the top 10 holdings combined only make up 5.7 percent of the fund.
Inspire Small/Mid Cap Impact ETF (ISMD)
Although there are many faith-based mutual funds, fewer ETF offerings exist. Inspire ETFs specialize in “biblically responsible investing” for evangelical Christians, with ISMD tracking an equal-weighted index of 500 small- and mid-cap U.S. stocks. The fund rules out companies potentially involved in any activities like abortion, pornography, human rights violations and LGBT lifestyles. That last screen has opened the fund to some controversy. ISMD also scores firms on family leave for employees, community volunteering, environmental protection or products that treat diseases or support education. Although some environmental components are included, ISMD also invests in a few fossil fuel companies including two master limited partnerships, NGL Energy (NGL) and Viper Energy (VNOM).
NuShares ESG Mid-Cap Value ETF (NUMV)
Another Nuveen product using the firm’s ESG methodology is this mid-cap value fund, which considers a stock’s price-to-book ratio, forward price-to-earnings ratio and dividend yield to find undervalued companies. NUMV has 73 holdings, making it somewhat concentrated, but the portfolio is weighted using an algorithm to reduce any risk-and-return distortions created by the fund’s ESG screen. As with the other Nuveen fund, financials account for the biggest sector, 37 percent of assets, and the top 10 holdings comprise 23 percent.
Etho Climate Leadership U.S. ETF (ETHO)
The environment is one of the main reasons investors choose ESG funds, and ETHO tracks the performance of an index of U.S. companies with the smallest carbon footprint in their industry. This is a total-market, equal-weight strategy, although the fund’s holdings are tilted more toward mid caps. Wascher says she likes ETHO’s rigorous, four-step selection process: The fund measures a firm’s total greenhouse gas emissions from operations, fuel use, supply chain and business activities, and then divides by market cap. ETHO also shuns companies in energy, tobacco, aerospace and defense, gambling, gold and silver. With 333 holdings, the fund is broadly diversified.
iShares MSCI KLD 400 Social ETF (DSI)
The biggest socially responsible fund by assets under management, DSI is a market-cap-weighted ETF investing in 400 of the largest U.S. companies that MSCI says have positive environmental, social and governance characteristics. Rocio Ortega, partner and associate advisor at WE Family Offices, says her firm uses DSI for ESG-minded clients. DSI avoids investing in industries like tobacco, firearms and nuclear power. With 33 percent of assets in the sector, the technology-heavy fund includes Microsoft Corp. (MSFT), Facebook (FB) and Alphabet’s Google (GOOG, GOOGL) as the top three holdings. Despite excluding big names like Apple (AAPL) and Exxon Mobil Corp. (XOM), “it still gives broad market exposure to the U.S. stock market,” Ortega says.
iShares MSCI Global Impact ETF (MPCT)
For a green ETF with international exposure, Ortega likes MPCT, a large-cap ETF with investments that promote the United Nation’s sustainable development goals, such as improving education or mitigating climate change. Companies in the ETF have socially conscious practices and also build their business around products and services that may drive positive social change. With 96 holdings, “it doesn’t give you the broad market exposure that you expect a global ETF to give you, but from an impact side, you do get a bit more focus from this ETF than you would from a broader type fund,” Ortega says.
iShares ESG 1-5 Year USD Corporate Bond ETF (SUSB)
Bond ETFs are relatively new vehicles for social change, but Scott Kubie, chief investment officer at Carson Wealth, says ESG criteria may help investors choose better bonds. With investment-grade corporate bonds, “ESG probably helps reduce the risk of default because you’re steering away from some of those companies that have known larger risks,” he says. His firm likes SUSB for short-term bond exposure. It excludes corporate bonds from tobacco companies and weapons manufacturers. Fund issuer BlackRock looks for companies that have developed robust strategies and programs to manage risks and opportunities related to themes such as climate change, resource scarcity and demographic shifts. Bank-related issues make up about a third of the fund’s holdings.
Sage ESG Intermediate Credit Index ETF (GUDB)
GUDB tracks an index of investment-grade, U.S. dollar-denominated debt with one to 10 years of maturity remaining. According to the prospectus, GUDB’s duration is similar to the Barclays Capital U.S. Intermediate Credit Bond Index — a little over four years. The fund includes a mix of mostly U.S. corporate debt and some foreign bonds, with holdings diversified among financials, industrials, utilities and government. Sage Advisory Services teamed with Sustainalytics to create a minimum ESG score threshold. Debt issuers must place within the top third of their peers to be included in the fund and are given an ESG Controversy Score, which must be a three or lower on a five-point scale.
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