Build a more diversified ESG portfolio with these funds. ESG investing is no longer reserved for the side dishes to your portfolio; it’s become so popular, you can now make an entire portfolio meal of…
Build a more diversified ESG portfolio with these funds.
ESG investing is no longer reserved for the side dishes to your portfolio; it’s become so popular, you can now make an entire portfolio meal of it. But to build an entire ESG portfolio without sacrificing diversification, you need ESG funds that cover all asset classes and geographic regions. To help you keep your portfolio both ESG friendly and diversified, here are eight global ESG funds to consider.
ESGD is currently ranked No. 11 in Best Foreign Large Blend ETFs by U.S. News & World Report, which means it ranks among even the best non-ESG large blend funds. Designed to track the MSCI EAFE Extended ESG Focused Index, it shines for its low cost (with an expense ratio of 0.20 percent), low turnover ratio (at 9 percent) and the diversity of its holdings, which cover nine geographic regions. Morningstar gives ESGD its highest sustainability rating and ranks it in the 2nd percentile on sustainability relative to the Foreign Large Blend category, says Jacqueline Kelly, deputy director of investment advisor research at PNC Asset Management.
For an emerging markets angle on ESG, iShares offers ESGE. ESGE tracks the MSCI Emerging Market Extended ESG Focused Index, and it does it well. Ranked No. 10 in Best Diversified Emerging Markets ETFs by U.S. News, ESGE is a great option for passive ESG investors seeking emerging market exposure. While heavily weighted toward Asia, both developed and emerging parts, it also gives investors exposure to positive ESG companies in Latin America and emerging European markets. Morningstar rates ESGE five globes for sustainability and in the top percentile on sustainability relative to the Diversified Emerging Markets category, Kelly says.
DFA International Sustainability 1 Portfolio (DFSPX)
A pioneer in factor-based mutual funds, DFA’s suite of sustainability funds underweight companies with high carbon footprints or greenhouse gas emissions and those that do other dirty deeds like manufacturing cluster munitions or using child labor, says Daniel Kern, chief investment officer of TFC Wealth Management in Boston. The bulk of DFSPX’s holdings are primarily in Europe and Japan. Morningstar gives it three globes for sustainability but four stars overall. It has consistently outperformed its benchmark, the MSCI ACWI ex USA Index, and has a below average net expense ratio of 0.39 percent.
The emerging markets version of DFA’s sustainability funds is a newborn in the realm of sustainability funds. Having just marked six months in existence, DESIX doesn’t have much of a track record to endorse it yet. It’s lagged behind its benchmark (MSCI Emerging Markets Index) by about 0.6 percent since inception, but then finding sustainable companies in emerging economies can be a challenge and the fund was only debuted in March 2018. It costs a bit more than DFSPX at 0.65 percent — still well below the category average expense ratio of 0.93 percent — but it gets you exposure to sustainable companies in Taiwan, China, Korea, India and Brazil. Morningstar gives it three globes for sustainability.
NuShares ESG International Developed Markets Equity ETF (NUDM)
Nuveen has used its best-in-class methodology for selecting ESG companies to create a best-in-class ESG fund with NUDM. By comparing companies against their peers as opposed to all companies, they’re able to construct exposures that better mimic the non-ESG universe in terms of risk characteristics, says Martin Kremenstein, head of ETFs at Nuveen. NUDM improves its ESG score versus its asset class by 32 percent and reduces carbon intensity by 62 percent, he says. With five globes from Morningstar, it ranks in the 100th percentile of all funds in MSCI’s ESG Fund Metrics coverage. NUDM has an expense ratio of 0.4 percent with 99 percent of its holdings outside the U.S.
NUEM takes Nuveen’s best-in-class methodology to the emerging markets. The bulk of the portfolio is in China (30.47 percent), Korea (14.42 percent), Taiwan (11.98 percent), India (10.71 percent), South Africa (6.76 percent) and Brazil (6.29 percent). With a 0.45 percent expense ratio, its costs less than the category average of 0.53 percent. NUEM ranks in the 53rd percentile of all funds in MSCI’s ESG Fund Metrics coverage but in the 94th percentile for its peer group and gets five sustainability globes from Morningstar. It improves its ESG score versus its asset class by 29 percent and reduces carbon intensity by 61 percent, Kremenstein adds.
Pax Ellevate Global Women’s Leadership Fund (PXWIX)
“Academic studies indicate that gender diversity matters on boards and in executive management,” Kern says. Companies with more diverse governance have been shown to outperform their less-diverse counterparts. To that end, PXWIX invests in the highest-rated companies worldwide for advancing women through greater gender diversity in leadership roles. While largely focused in North America, the fund invests over one-third of its portfolio in foreign stocks. Top holdings include Microsoft Corp. (MSFT), Target Corp. (TGT), Wolters Kluwer, and Michael Kors (KORS). Morningstar gives PXWIX five globes for sustainability and four stars overall. It has an expense ratio of 0.56 percent.
Compelling investment opportunities are to be found in Asia, “given the rising importance of Asia in the global economy and the rapid growth of the middle class,” Kern says. Asia is also facing “carbon emissions challenges, a need for creative approaches to health care, and room for improvement in governance,” all of which make ESG factors “vitally important” to the area. As one of the few Asia-focused ESG funds, MASGX is a good international ESG fund to consider, he says. However, the fund doesn’t come cheap at a 1.5 percent expense ratio. Morningstar gives it three globes for sustainability.