It’s been called different names since investors started eschewing tobacco producers or companies involved with South African apartheid, but environmental, social and governance investing, or ESG, has been around for a while.
Still, this type of investment has gained traction along with education about the climate crisis and the heightened profile of some social justice movements.
Last year, assets under management in sustainable strategies including ESG in the U.S. made up around $8.4 trillion of the $66.6 trillion in total U.S. assets under professional management, according to the US SIF Foundation. That was up from virtually nothing in 1995, when the foundation began keeping track.
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“While historically ESG funds focused more on the ‘E’ — i.e., environmental sustainability — as it was easier to measure, attention is increasingly being placed on the ‘S’ or social aspect, which includes diversity, equity and inclusion efforts, paying a living wage, human rights — often an issue in complex supply chains — and so on,” says Noa Gafni, executive director at the Rutgers Institute for Corporate Social Innovation.
Increasingly, investors see ESG criteria as a new way to assess the risks a company faces rather than simply as a screen to weed out certain companies or industries they deem objectionable.
“These types of initiatives are not just moral imperatives and PR efforts,” Gafni says. “When organizations don’t pay attention to these ‘S’ issues and others, they open themselves up to significant risks.”
At the same time, the environmental aspect of ESG investing has come under increased scrutiny, with Republican resistance to funds that screen out oil, natural gas and coal companies. One of their arguments is that ESG investors have missed out on the strong gains in the energy sectors as prices skyrocketed, in part as the war in Ukraine boosted oil and natural gas prices.
While that’s true, it’s also true that over a longer time horizon the volatile energy sector hasn’t performed nearly as well.
Regardless of the fighting among politicians, it appears that ESG investing is here to stay. Here’s a look at seven of the best funds:
| ESG fund | Expense ratio |
| Etho Climate Leadership US ETF (ticker: ETHO) | 0.47% |
| AXS Change Finance ESG ETF (CHGX) | 0.49% |
| Democracy International Fund (DMCY) | 0.5% |
| Nia Impact Solutions Fund (NIAGX) | 0.99% |
| VanEck HIP Sustainable Muni ETF (SMI) | 0.24% |
| AXS Green Alpha ETF (NXTE) | 1% |
| First Trust Nasdaq Clean Edge Green Energy ETF (QCLN) | 0.58% |
Etho Climate Leadership US ETF (ETHO)
ETHO is based on an index that tracks the performance of stocks of a diversified set of U.S. companies that are leaders in their industries when it comes to reducing their carbon impact.
Their carbon footprint is calculated based on the total of greenhouse gas emissions from operations, fuel use, supply chain and business activities divided by market capitalization.
With an inception date in November 2015, the fund has been around for a while, and has amassed around $170.8 million in assets under management.
All fossil fuel, tobacco, weapons and gambling companies are eliminated from the index, according to the fund description.
The fund has an expense ratio of 0.47%.
Beyond that expense, the fund is an example of how not investing in fossil fuels can drag down returns over the short run.
The fund has gained around 3.5% year to date, compared with the S&P 500’s rise of more than 8%. That broad market rise is led by the energy sector, which is up around 15% over the past year.
But it also illustrates another point about ESG investing that avoids the notoriously volatile energy sector, which is tied to the boom-and-bust cycle of economic ups and downs.
Over the past five years, this fund as well as the S&P 500 are up around 9.4% on an annualized basis, while the energy sector had only gained around 3.6% as of May 1.
AXS Change Finance ESG ETF (CHGX)
This fund may work for investors looking for a broad ESG fund as a replacement for a general S&P 500 fund.
The fund starts with the 1,000 largest U.S. companies and whittles that down to 100 large- and mid-capitalization equities that pass a screening of 125 ESG factors.
In addition to weeding out fossil fuels and harmful emissions, the fund also screens for a host of criteria like human rights, non-discrimination, money laundering and board independence.
Despite not having exposure to fossil-fuel extraction, processing, transportation or generation companies, the fund still tracks pretty closely with the S&P 500. Over the past five years, the fund has returned 10.1% on an annualized basis.
When you look at total returns over that period, the fund shines compared with energy investments. Over that time CHGX and the S&P both rose more than 50% while the energy sector was up around 20%.
“Investing in climate solutions and resiliency will be growth investing going forward,” says Peter Krull, director of sustainable investing at Earth Equity Advisors. “Legacy polluting industries will follow the same path as buggy whips of the late 19th century.”
The fund has an expense ratio of 0.49%.
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Democracy International Fund (DMCY)
The ESG movement is not just about avoiding sin stocks and fossil fuel companies. It’s also about including companies tied to social trends investors deem as positive. Take DMCY, for example.
“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 is mostly composed of large- and mid-cap stocks in democratically led nations outside the U.S. The fund, which invests heavily in Europe, Japan and the U.K., has an expense ratio of 0.5%.
Nia Impact Solutions Fund (NIAGX)
One argument for investing in companies that prioritize diverse and inclusive workforces is that they may be less vulnerable to discrimination lawsuits, which can cost a lot of money and time.
Investors wanting to avoid this financial impact can consider this mutual fund, which invests in companies that contribute toward advancements in diversity and inclusion, sustainability, and social justice.
Most of its holdings are large-cap companies. But around 18% of the fund’s portfolio is in mid-caps, with around 10% in small caps, as of the end of March.
Specialty funds can be expensive, and this one has an expense ratio of 0.99%.
Expenses are a drag on returns, especially over the long term. But for some investors, aligning their portfolio with their values is worth the cost.
VanEck HIP Sustainable Muni ETF (SMI)
Bonds generally offer less risk than stocks. Municipal bonds offer another advantage — you don’t have to pay federal taxes on the interest you earn with them. They’re also often exempt from state income taxes if you buy them within the state where they’re issued.
As with other funds, bond fund diversification can be a benefit. And, for those interested in sustainability, that’s where this investment vehicle comes in.
SMI’s portfolio includes investment-grade municipal debt securities that finance issuers with operations or projects helping to promote progress toward sustainable development.
More than half of the fund’s portfolio comes from New York and California. But it also has a healthy smattering of holdings from a dozen other states.
At 0.24%, this fund’s expense ratio is the lowest on this list.
AXS Green Alpha ETF (NXTE)
Green Alpha’s “Next Economy” investment methodology refers to what it calls “an indefinitely thriving economy driven by companies developing innovative solutions to major systemic risks, like the climate crisis, resource degradation, widening inequality and human disease burden,” the company’s website says.
The pillars of that investment analysis system include economic productivity gains through digitalization and renewable energy technologies such as solar, wind and geothermal. It also looks for companies involved in creating value from what would otherwise be waste — also known as recycling — to reduce extraction of primary geological resources.
More than half of its portfolio is invested in technology and energy companies, and its second-biggest holding is Vestas Wind Systems A/S (VWDRY), a wind turbine manufacturer that stands to benefit from the offshore wind boom in the U.S. The company also makes wind turbines for onshore wind farms.
With an expense ratio of 1%, this fund edges out the Nia Impact Solutions Fund for the spot as the most expensive fund on this list.
First Trust Nasdaq Clean Edge Green Energy ETF (QCLN)
This fund tracks the performance of an index of small-, mid- and large-cap clean energy companies that are publicly traded in the U.S.
To be included in that index, companies have to be involved in advanced materials that enable clean energy technologies; energy intelligence such as automated meter reading; renewable electricity generation such as solar panels; renewable fuels such as biodiesel; or energy storage and conversion such as advanced batteries and hybrid drivetrains
About 27% of its holdings are in renewable energy equipment companies, while semiconductor firms make up the No. 2 spot at more than 17%. ON Semiconductor Corp. (ON) is its top holding, followed by Tesla Inc. (TSLA).
The fund’s expense ratio is 0.58%.
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7 Best ESG Funds to Buy Now originally appeared on usnews.com
Update 05/03/23: This story was previously published at an earlier date and has been updated with new information.
