Funds aligned with ESG ethics are poised to shine over time.
The United Nations kicked off its 2022 climate change summit with a warning that the world is losing the fight against climate change. And it’s not just politicians and scientists who are paying attention to environmental, social and governance, or ESG, considerations. So are investors. Wall Street is increasingly betting that companies more aligned with ESG ethics will provide better returns over time. “We believe material environmental, social and governance factors are pre-financial indicators that can affect a company’s future financial viability and clients’ long-term, risk-adjusted investment returns,” says Chris Huemmer, senior investment strategist with FlexShares Exchange Traded Funds at Northern Trust Asset Management, which has a suite of ESG and climate ETFs. “When managed well, they can position a company for success; and when mismanaged, they can result in significant risks.” With that in mind, here are seven of the best ESG funds to buy now.
Etho Climate Leadership US ETF (ticker: ETHO)
“Now is a great time to invest to benefit people, planet and trust as markets are now more reasonably valued, and recessions are a better time to buy at lower prices for stocks and funds,” says R. Paul Herman, CEO of HIP Investor. “Plus, we need to take climate action now and invest in firms that are benefiting workers, nature and trust overall.” As part of his firm’s efforts to do this, its portfolios allocate to ETHO, which is based on an index that tracks the performance of stocks of a diversified set of U.S. companies that are leaders in their industry when it comes to reducing their carbon impact (calculated by the total of greenhouse gas emissions from operations, fuel use, supply chain and business activities divided by market capitalization). The fund has an expense ratio of 0.47%.
AXS Change Finance ESG ETF (CHGX)
Herman, whose fund manages fossil-fuel-free ESG-focused portfolios and rates the sustainability criteria of more than 120,000 bond issuers and 11,000 corporates, points to this large-cap equity fund as an ESG-focused replacement for funds that mirror the S&P 500. The fund’s portfolio consists of about 100 large- and mid-capitalization equities of U.S.-listed companies. “Sustainable firms which are higher in ESG tend to benefit from higher return on investment,” Herman says. That’s because they prioritize people, with fair wages and reasonable CEO pay; the planet, by reducing water, energy, waste and emissions; and trust, with fewer lawsuits, less lobbying and more transparency about how they act, he says. “All of these quantifiable metrics tend to benefit cash flows and profit while also reducing risk,” he says. The fund has an expense ratio of 0.49%.
Democracy International Fund ETF (DMCY)
Herman also likes this international equity fund that is mostly composed of large- and mid-cap stocks in democratically led nations outside the U.S. “The intent of the fund is to enable investors to allocate more into democracies, thereby shifting capital flows toward democratic countries and away from authoritarian countries,” the fund’s website says. “This could lower the cost of capital and improve economic growth for democracies and the opposite for authoritarians, resulting in market-based incentives for democratic reforms.” The fund, which invests heavily in Europe, Japan and the U.K., has an expense ratio of 0.5%.
Nia Impact Solutions Fund (NIAGX)
This mutual fund that Herman recommends invests in companies that contribute toward advancements in diversity and inclusion, sustainability and social justice. “The underlying fundamentals show that ESG-focused firms are more visible about how they treat workers well, preserve our planet for future generations, and build strong relationships with all stakeholders — employees, suppliers, governments, nonprofits,” Herman says. “All of these factors can be beneficial for portfolios and for society.” Specialty funds can be expensive, and this one has an expense ratio of 0.99%.
VanEck HIP Sustainable Muni ETF (SMI)
For those interested in owning an ESG fund that invests in municipal bonds — which can offer less risk than stocks and boast tax-free interest payments — Herman’s firm teamed up with VanEck to offer this fund. Its portfolio includes investment-grade municipal debt securities that finance issuers with operations or projects helping to promote progress toward sustainable development. It normally invests at least 80% of its total assets in investments that produce income that is exempt from U.S. federal income tax. At 0.24%, this fund’s expense ratio is relatively low compared with the others on this list.
AXS Green Alpha ETF (NXTE)
Looking toward the economy of the future, ESG funds that invest in companies focused on positive solutions should outperform those that simply try to mimic traditional indexes, says Peter Krull, CEO of Earth Equity Advisors. With so many companies’ shares on the backfoot amid the broad market downturn, Krull says now is an especially good time to dollar-cost average into high-quality offerings focused on the next economy, such as this fund, which is his top pick. “They are so much more than just ESG,” he says. “Their next economy philosophy focuses on picking companies that are leaders in the new, or next, sustainable economy rather than simply being ‘less bad,’ as most ESG funds are.” This fund has a relatively high expense ratio of 1%.
First Trust Nasdaq Clean Edge Green Energy ETF (QCLN)
Krull says this fund avoids the trap of buying stocks of companies with future plans to be carbon-neutral or utilities that still generate most of their electricity from fossil fuels. “Of the many clean energy funds out there, this one stands out because its holdings are actually focused only on the clean, sustainable economy,” he says. The fund tracks the performance of small-, mid- and large-cap clean energy companies that are publicly traded in the U.S. Its top holding is Albemarle Corp. (ALB), a leading producer of lithium, a metal crucial to electric vehicle batteries. The fund’s expense ratio is 0.58%.
7 best ESG funds to buy now:
— Etho Climate Leadership US ETF (ETHO)
— AXS Change Finance ESG ETF (CHGX)
— Democracy International Fund ETF (DMCY)
— Nia Impact Solutions Fund (NIAGX)
— VanEck HIP Sustainable Muni ETF (SMI)
— AXS Green Alpha ETF (NXTE)
— First Trust Nasdaq Clean Edge Green Energy ETF (QCLN)
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Update 11/08/22: This story was published at an earlier date and has been updated with new information.