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Choosing a socially responsible fund can be confusing.  Here’s what you need to know

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Investment funds that promote values ​​such as the environment and social good have become more popular.

But trying to choose a so-called ESG fund – especially one that matches your interests well – can seem as easy as drying a towel in a torrential downpour.

“I think it can be very difficult to know where to start,” said Fabian Willskytt, associate director of public markets at Align Impact, a financial advisory firm specializing in values-based investing.

Fortunately, investors can follow a few simple steps to get started and invest with confidence.

ESG funds

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Funds that allocate investor money based on environmental, social and governance issues held $357 billion at the end of 2021, more than four times the total three years earlier, according to Morningstar, which tracks data on mutual funds and exchange-traded funds.

Investors poured $69.2 billion into ESG funds (also called sustainability or impact funds) last year, a yearly high, according to Morningstar.

These bottoms come in a variety of flavors. Some may seek to promote gender or racial equality, invest in green energy technology, or avoid fossil fuel, tobacco, or weapons companies, for example.

Women and younger investors (under 40) are most likely to be interested in ESG investing, according to survey data from Cerulli Associates. About 34% of financial advisors used ESG funds with clients in 2021, up from 32% in 2020, according to the Financial Planning Association.

There are now more than 550 ESG mutual funds and exchange-traded funds available to US investors, more than double the universe five years ago, according to Morningstar.

“An individual investor has much more [ESG options] and can build a portfolio in ways they couldn’t 10 years ago,” said Michael Young, head of education programs at the Forum for Sustainable and Responsible Investing. ” Almost all [asset] category that I can think of has a fund option, so we’ve come a long way.”

But fund managers can be more or less rigorous when investing your money, which means that the environmentally focused fund you’ve purchased isn’t necessarily as “green” as you think.

Here’s an example: some fund managers may “integrate” ESG values ​​when choosing where to invest money, but this may only play a supporting (not central) role. Conversely, other managers have an explicit ESG mandate that forms the backbone of their investment decisions.

But investors may not know the difference.

The Securities and Exchange Commission proposed rules last week that would increase transparency for investors and make it easier to select an ESG fund. The rules would also crack down on “greenwashing”, whereby fund managers mislead investors about the holdings of ESG funds.

ESG advice for investors

All of this might leave you thinking: how do I get started? And how can I be sure that my investments really correspond to my values?

According to ESG experts, investors can take a few simple steps.

One way to start is to look at asset manager, which is a good “abbreviation” for investors, according to Align Impact’s Willskytt.

Some companies focus on ESG and have a long history of investing that way — two encouraging signs for people serious about values-based investing, he said.

If you trust the manager, the funds will be more or less solid from an ESG point of view.

Fabian Willskytt

Associate Director of Public Procurement at Align Impact

Investors can get an idea of ​​a company’s commitment by looking at its website and whether it lists ESG as a major objective, he added. From there, investors can choose from the available funds of this company.

“It’s definitely a red flag if you can only find the minimum of [website] information,” said Jon Hale, director of sustainability research for the Americas at Sustainalytics, which is owned by Morningstar. “This suggests engagement may not be as high as with other funds. “

Examples of ESG-focused companies include Calvert Research and Management and Impax Asset Management, Willskytt said. Nuveen, which is owned by TIAA, also has a relatively long track record in ESG investing, he added.

Morningstar ranked Calvert and Pax, along with four others (Australian Ethical, Parnassus Investments, Robeco and Stewart Investors) as leaders in ESG asset management, according to an ESG Engagement Level Assessment published in 2020. (However, not all are aimed at US retail investors.) Six others, including Nuveen/TIAA, scored one level lower in the “advanced” ESG category.

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“If you have confidence in the manager, the funds will be more or less strong from an ESG perspective,” Willskytt said. “Then it’s about finding the flavors that work for you.”

There is, however, a downside. Despite the growth of ESG funds, investors may not yet be able to easily find a fund that addresses a specific issue, depending on the niche. There are many climate-focused funds and broad ESG funds that represent many different value-based filters, for example, but something like an unarmed fund is harder to find, experts said.

Most (70%) sustainable funds are actively managed, according to Morningstar. They may have higher annual fees than the current funds in your portfolio (depending on your current holdings).

Investors who want to learn a little more about ESG before getting started can check out a free course on the basics from the Forum for Sustainable and Responsible Investing.

Another approach

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Investors can also start by browsing a few free mutual fund and ETF databases.

The Forum for Sustainable and Responsible Investing has one that allows investors to sort ESG funds by categories such as asset class (equities, bonds, and balanced funds, for example), issue type and the minimum investment.

This list is not exhaustive, however – it includes funds from Forum member companies. (However, the company’s membership can be a reliable screen for the asset manager’s ESG rigor, Young said.)

As You Sow is another organization that can help investors find funds that are fossil fuel-free, gender-equitable, gun-free, jail-free, weapon-free, and tobacco-free, for example. It maintains the rankings of the best funds by category.

An individual investor has much more [ESG options] and can build a portfolio in ways they couldn’t 10 years ago.

Michael Young

Head of Education Programs at the Forum for Sustainable and Responsible Investment

Alternatively, investors can also use the As You Sow website to assess how well their current investments match their values. They can enter a fund’s ticker symbol, which generates a fund score according to different value categories.

Other companies also assign ESG ratings to specific funds. Morningstar, for example, assigns a certain number of “globes” (5 being the best score) so that investors can assess the ESG scope of the fund. Morningstar has an ESG screen that also allows investors to screen funds based on certain ESG parameters.

A caveat: the global system and other third-party ratings do not necessarily signal an asset manager’s ESG intent. In theory, a fund could have excellent ESG ratings by accident, not because of a manager’s orientation.

Investors can use fund databases to identify ESG investments they might like, then research the asset management company to see how committed the company is to ESG overall.

For investors who aren’t as DIY-oriented, working with a financial advisor knowledgeable about ESG can be the surest way to know that your investments best align with your values ​​and align with your overall portfolio and your investment goals. Advisors may have more advanced screening tools at their disposal than a retail investor, for example.

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