During the first half of this year, sustainable funds outperformed traditional funds and saw their assets under management hit record highs.
Sustainable fund assets now make up roughly 8% of total global assets under management, and these funds returned a median 6.9% compared with 3.8% for traditional funds, according to the Morgan Stanley Institute for Sustainable Investing.
The outperformance came as growth stocks rebounded and environmental, social and governance, or ESG, investors boosted their use of restriction screening, Morgan Stanley said.
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If you read the financial press, or even the politics pages, you’ve probably heard of ESG investing. This type of investment has gained traction along with education about climate change and the heightened profile of some social justice movements.
Although restriction-based investing remains popular, 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. At the same time, critics point out that ESG investors miss out on big run-ups in fossil fuel companies, and they say that the trend is a way for big fund managers to tilt investing toward more liberal social goals.
Politics aside, ESG investing is continuing to gain in popularity. PwC expects global asset managers to boost their ESG-related assets under management to $33.9 trillion by 2026, up from $18.4 trillion in 2021. The professional services firm says these assets will make up more than 21% of total global assets under management in less than half a decade.
Investors who want to get in on this trend can consider these seven funds. While not all of them have “ESG” in their name, they all focus on at least one of the three criteria for that type of investing:
| ESG Fund | Expense ratio | YTD return* |
| iShares ESG Screened S&P 500 ETF (ticker: XVV) | 0.08% | 23.7% |
| Invesco Solar ETF (TAN) | 0.69% | -37.6% |
| iShares Global Clean Energy ETF (ICLN) | 0.41% | -29.6% |
| Democracy International Fund (DMCY) | 0.5% | 10% |
| Nia Impact Solutions Fund (NIAGX) | 0.99% | 4% |
| VanEck HIP Sustainable Muni ETF (SMI) | 0.24% | 0.4% |
| Matthews Emerging Markets Sustainable Future Fund (MASGX) | 1.24% | 6.7% |
*Based on market price as of Nov. 24.
iShares ESG Screened S&P 500 ETF (XVV)
Christopher Day, founder and CEO of Days Global Advisors, points to funds that track key indexes but that also have an ESG tilt. These funds provide the sustainable investing screen but also still provide the broad diversification that makes index investing attractive.
“That allows you to express that investor mandate but still know that you’re holding core companies,” he says.
The iShares ESG Screened S&P 500 ETF uses the S&P 500 Sustainability Screened Index to track large-capitalization U.S. equities that avoid controversial business activities.
Its top holdings skew heavily toward the tech industry, and they also include electric vehicle maker Tesla Inc. (TSLA), conglomerate Berkshire Hathaway Inc.’s B shares (BRK.B) and UnitedHealth Group Inc. (UNH).
The fund has an expense ratio of 0.08% and is up 23.7% this year as of Nov. 24. That’s well over the full S&P 500’s 18.7% increase.
Invesco Solar ETF (TAN)
Renewable energy companies, including those involved in solar projects, have been hit hard as interest rates have been rising. Their projects take a lot of up-front capital, and the higher interest rates make it more expensive to borrow.
But their products are in demand as governments and companies around the world seek to lower their carbon emissions and diversify their sources of energy, giving renewable energy companies a long growth trajectory.
“Solar will have its season again,” Day says. “If you’re a long-term investor, I say invest in it.”
The fund has a 0.69% expense ratio and is down nearly 38% so far this year.
[READ: 6 Steps to Get Started With ESG Investing]
iShares Global Clean Energy ETF (ICLN)
For broader exposure to the renewable energy sector, the iShares Global Clean Energy ETF holds positions in more than 100 equities, including stocks of companies involved in wind and solar.
“The focus on climate change risk and (a) net-zero emissions target is intensifying, with investors closely examining companies’ initiatives to reduce their carbon footprint and align with global climate goals,” says Sergei Grechkin, chief risk officer at UFG Capital.
The fund screens for companies involved in controversial weapons, small arms, military contracting, tobacco, thermal coal, oil sands, shale energy, and arctic oil and gas exploration.
It’s been around since 2008 and has assets above $2.6 billion. Its holdings include First Solar Inc. (FSLR) and Vestas Wind Systems A/S (VWS.CO).
The fund’s biggest industry exposure is renewable electricity, at about 25% of allocations, followed by electric utilities, heavy electrical equipment, and semiconductors and their equipment.
The fund has an expense ratio of 0.41% and is down 29.6% so far this year. “As interest rates start to lower, you’re going to see some great bargains in ESG,” Day says.
Democracy International Fund (DMCY)
Turning to the “social” criteria for ESG investing, this fund focuses on supporting democracy outside of the United States.
Investors have been increasingly focused on putting money in investments they feel are socially aligned with their political and personal views, Day says. “There’s been more of a shift to the social side,” he says.
Shifting more capital into democratically led nations could spur democratic reforms in authoritarian regimes, the fund states. Toward this aim, DMCY invests in a mix of companies and other funds, but it says that as the fund grows, shares of funds may be replaced with more corporate securities.
The fund tracks an index that it says “overweights democracies that embrace ideals such as freedom of speech, fair elections and civil liberties, and it underweights authoritarian states with links to human rights abuses such as genocide and child labor, as well as media censorship, judicial corruption and a lack of free and fair elections.”
DMCY has an expense ratio of 0.5% and is up about 10% year to date.
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.
A more diverse workplace can also mean more women and minorities are promoted to leadership positions, which is important to investors concerned about the corporate governance aspect of ESG investing.
“The ‘G’ in ESG is just a great filter in general,” Day says. “Transparency of the company is good. You want good governance.”
The fund has an expense ratio of 0.99% and is up 4% so far this year as of Nov. 24.
[7 Best Carbon Capture and Decarbonization Investments]
VanEck HIP Sustainable Muni ETF (SMI)
Experts giving very general investing advice say that a target portfolio should consist of 60% stocks and 40% bonds. The stocks offer growth potential, and depending on the sector, some defensiveness, while the bonds offer more of a protective cushion.
With bonds generally having less risk than stocks, investors may want to consider the fixed-income side of ESG investing.
This fund includes investment-grade municipal bonds that finance issuers with operations or projects helping to promote progress toward sustainable development.
A substantial amount of the fund’s portfolio comes from New York and California. But it also has a healthy smattering of holdings from other states.
While bonds may add protection to a portfolio, they also might not return as much as stocks. This fund is essentially flat year to date, and it has an expense ratio of 0.24%.
Matthews Emerging Markets Sustainable Future Fund (MASGX)
A key trend in ESG investing is Asia’s significant role, especially as China seeks carbon neutrality in coming decades, Grechkin says.
“The region’s rapid economic growth over the past decade, coupled with its substantial population, has led to increased demand for infrastructure projects … presenting ample ESG investment opportunities in Asia,” he says.
Formerly known as the Matthews Asia ESG fund, this fund has more than 40% of its portfolio holdings in China and Hong Kong. India, Taiwan and South Korea round out its top four investment jurisdictions.
The industrials sector, which will need substantial carbon abatement investment in coming years, makes up roughly 17% of the fund, after financials and information technology, which are two relatively easy-to-abate sectors.
This fund has an expense ratio of 1.24% and is up 6.7% year to date as of Nov. 24.
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7 Best ESG Funds to Buy Now originally appeared on usnews.com
Update 11/27/23: This story was previously published at an earlier date and has been updated with new information.
