ESG investing is more popular than ever.
With the proliferation of funds that focus on environmental, social and corporate governance, or ESG, criteria, investors have more choices than ever when it comes to investing in green energy and environmentally friendly companies. For those who don’t want to do the financial and environmental research that goes into picking individual investments, there are a growing number of green mutual funds that at the very least screen out many polluters. In addition to negative screens — such as weeding out fossil fuel companies — some environmentally focused funds have a more proactive philosophy that allows them to pick stocks for their potential in the greener economy of the future. A more hands-on approach can also prove better than index-tracking at identifying companies that engage in “greenwashing,” or making themselves look more environmentally friendly than they are. Here are seven green mutual funds to consider.
Vanguard FTSE Social Index Fund (ticker: VFTAX)
For investors looking for a starter fund in the environmental investing world, John McGlothlin III, financial planner with Southwest Retirement Consultants, points to this Vanguard fund. The fund excludes stocks of companies that own coal, oil or natural gas reserves or that generate revenues from nuclear power production, in addition to purveyors of alcohol, tobacco, weapons, gambling and adult entertainment. It’s debatable whether ESG funds should exclude nuclear power from their portfolios given the threat posed by carbon emissions, but the exclusion of fossil fuel companies is certainly in line with ESG priorities. While the fund is passively managed and tracks an index, it does represent a broad set of companies screened for certain ESG factors. The fund also comes with a low annual expense ratio of 0.14%, or $14 for every $10,000 invested. “If you want to screen out the worst players in the S&P 500, this is a great place to start,” McGlothlin says.
Trillium ESG Global Equity Fund (PORTX)
As green funds go, McGlothlin also likes PORTX, which is not only actively managed but also participates in shareholder activism. “I think Trillium is fully bought into the ESG mandate,” he says. This fund invests domestically and internationally, including emerging markets, which McGlothlin says gives fund managers an edge because they aren’t constrained to certain geographies. Trillium Asset Management, which runs the fund, says it has a dual mandate for investing in companies that are both environmental leaders and have quality financial metrics. “The Trillium ESG Global Equity Fund is designed to address the risks and opportunities created by the increasing constraints on natural capital,” the fund’s profile says. Top holdings include tech giant Apple (AAPL) and online payments company PayPal Holdings (PYPL). The fund’s expense ratio is a bit high, at 1.3%.
Shelton Green Alpha Fund (NEXTX)
This fund’s stated investment objective is to “achieve long-term capital appreciation by investing in stocks in the green economy,” and Earth Equity Advisors CEO Peter Krull likes its forward-looking philosophy. “They owned Moderna (MRNA) before anyone knew who the hell Moderna was because they’re trying to see where we’re going,” Krull said, referencing one of the companies that developed a COVID-19 vaccine. In the fourth quarter, the fund returned more than 43%. One of the top two contributing sectors to its year-to-date returns was energy, with solar energy equipment makers leading returns within the energy sector. Wind energy companies also contributed meaningfully to the fund’s performance. NEXTX has an expense ratio of 1.28%.
Vert Global Sustainable Real Estate Fund (VGSRX)
Nearly 40% of global energy-related carbon dioxide emissions came from the operations of buildings in 2019, according to a report last year from the United Nations and the Global Alliance for Buildings and Construction. That means making buildings more efficient is one of the key solutions to combating climate change, Krull says. And being efficient can mean saving money, too, with real estate investment trusts, or REITS, realizing that investments in efficiency end up helping the bottom line, he adds. Vert Asset Management says the real estate sector offers ESG investors opportunities to capitalize on companies increasing the value of their buildings by making them “healthier, more efficient and more profitable.” The fund gives investors exposure to what Vert says are the most sustainable real estate companies and offers international and property sector diversification. That currently includes stocks like American Tower (AMT) and Simon Property Group (SPG). It comes with an expense ratio of 0.5%.
Thornburg Better World International Fund (TBWAX)
Investing internationally can carry more risk than domestic picks, both for returns as well as environmental sustainability. That said, putting money abroad can also mean higher returns — and it doesn’t have to mean investing in companies with shoddy environmental practices. Krull says this international fund from Thornburg has a good track record. Although its lack of energy holdings contributed to underperforming the MSCI ACWI ex USA Index during the fourth quarter, the ESG fund exceeded that index’s performance for the whole of 2020. Beyond the stocks the fund chooses to invest in, Thornburg Investment Management, which runs the fund, is headquartered in a building that has been certified for energy efficiency and environmentally friendly design. Something investors should note, TBWAX has a higher expense ratio than others on this list, at 1.83%.
Calvert Emerging Markets Equity Fund (CVMAX)
Calvert has been involved in socially conscious investing for decades and has several actively managed ESG funds. CVMAX is one of McGlothlin’s personal favorites because Calvert’s shareholder activism and the fund’s costs (it has an expense ratio of 1.24%) are generally on par with other emerging-markets funds that he likes. “They’re doing shareholder engagement,” says Jeff Gitterman, co-founder of Gitterman Wealth Management. According to its principles for responsible investing, Calvert seeks to invest in companies that, among other things, manage water scarcity and ensure efficient and equitable access to clean sources, diminish climate-related risks, and drive sustainability innovation and resource efficiency. Top holdings for this fund include Taiwan Semiconductor Manufacturing (TSM) and Chinese e-commerce giant Alibaba Group (BABA).
TIAA-CREF Green Bond Fund (TGROX)
Equities aren’t the only way to invest according to environmental principles. “Most investors first think of stocks when they consider green investing,” McGlothlin says, “but the bond market is an equally important way to gain exposure to environmentally conscious financial assets.” Green bonds hold debt that is issued to fund projects designed to have positive environmental outcomes, and McGlothlin says the TIAA-CREF Green Bond Fund is a good option in this space. The fund holds investments in a variety of sectors including investment-grade corporate bonds, asset-backed securities, municipal bonds and emerging-market debt. The fund “invests in bonds whose proceeds target positive outcomes via renewable energy, climate change, and natural resource projects and initiatives without compromising return potential,” according to its website. It comes with an expense ratio of 0.8%.
Seven of the best green mutual funds to buy:
— Vanguard FTSE Social Index Fund (VFTAX)
— Trillium ESG Global Equity Fund (PORTX)
— Shelton Green Alpha Fund (NEXTX)
— Vert Global Sustainable Real Estate Fund (VGSRX)
— Thornburg Better World International Fund (TBWAX)
— Calvert Emerging Markets Equity Fund (CVMAX)
— TIAA-CREF Green Bond Fund (TGROX)
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