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

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

But trying to pick a so-called ESG fund — especially one that suits your interests well — can seem as easy as wiping your towel in the rain.

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

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

ESG funds

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According to Morningstar, which tracks data on mutual and exchange-traded funds, funds that allocate investors’ money according to environmental, social and governance concerns held $357 billion at the end of 2021, more than four times what they had three years earlier. .

Investors poured $69.2 billion into ESG funds (also known as sustainability or impact funds) last year, according to Morningstar, an annual record.

These products come in a variety of flavors. Some may, for example, seek to promote gender or racial equality, invest in clean energy technologies, or shun companies that extract fossil fuels, tobacco, or weapons.

According to a survey by Cerulli Associates, women and young investors (under 40) are most often interested in investing in ESG. About 34% of financial advisors used ESG funds with clients in 2021, up from 32% in 2020, according to the Financial Planning Association.

More than 550 ESG mutual and exchange-traded funds are currently available to U.S. investors, more than double what they were five years ago, according to Morningstar.

“The individual investor has much more [ESG options] and can build a portfolio in a way they couldn’t 10 years ago,” said Michael Young, Education Program Manager, Forum for Sustainable and Responsible Investments. “Almost every [asset] The category I can think of has a funding option, so we’ve come a long way.”

But fund managers can vary in their strictness when investing your money, which means the environmentally-focused fund you buy isn’t necessarily as “green” as you think.

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

But investors may not know the difference.

Securities and Exchange Commission proposed rules last week that would increase transparency for investors and make it easier to choose an ESG fund. The rules will also stop greenwashing, where money managers mislead investors about the assets of ESG funds.

ESG tips for investors

All of this might make you wonder: where do I start? And how can I be sure that my investments are truly in line with my values?

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

One way to get started is to look into an asset manager, which Align Impact’s Wilskitt says serves as a good “shortcut” for investors.

Some firms are focused on ESG and have a long history of investing that way, he says — both are encouraging signs for people who are serious about value-based investing.

If you trust the manager, the funds will be more or less strong in terms of ESG.

Fabian Wilskitt

Deputy Director of Public Markets at Align Impact

He added that investors can get a sense of the firm’s commitment by looking at its website and indicating if it’s ESG is its primary focus. From there, investors can choose from the firm’s available funds.

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

Examples of ESG-focused firms include: Calvert Research and Management as well as Impax Asset ManagementWilskitt said. Nuvinowned by TIAA also has a relatively long history of investing in ESG, he added.

morning Star rating Calvert and Pax, along with four others (Australian Ethical, Parnas InvestmentsRobeco and Stewart Investors) as leaders in ESG asset management. ESG Commitment Level estimate released in 2020. (However, not all of them cater to individual US investors.) Six more, including Nuveen/TIAA, ranked lower in the “advanced” ESG category.

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“If you trust the manager, the funds will be more or less strong in terms of ESG,” Willskitt said. “Then it’s about finding fragrances that work for you.”

However, there is a downside. Despite the growth of ESG funds, investors still cannot easily find a fund that fits a particular problem, depending on the niche. For example, there are many climate-focused funds and broad ESG funds that take into account many different cost-based filters, but experts say it’s harder to find something like a gun-free fund.

According to Morningstar, the majority (70%) of sustainable funds are actively managed. The annual fee for them may be more than for the current funds in your portfolio (depending on your current assets).

Investors who want to learn a little more about ESG before taking the plunge can check out the free well Fundamentals of the Forum for Sustainable and Responsible Investments.

Another approach

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

Sustainable and Responsible Investment Forum there is one This allows investors to sort ESG funds into categories such as asset class (such as stocks, bonds, and balanced funds), issue type, and minimum investment.

However, this list is not exhaustive – it includes funds from member firms of the Forum. (However, according to Yang, the fact that the firm is a member could be a good cover for the asset manager’s ESG rigor.)

how do you sow is another organization that can help investors find funds that are free of fossil fuels, gender equality, guns, prisons, guns, and tobacco, for example. He supports rating of the best funds by category.

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

Michael Young

Manager of Educational Programs of the Forum for Sustainable and Responsible Investments

In addition, investors can also use the As You Sow website to assess how their current investments are in line with their values. They can enter a fund ticker that generates a fund valuation according to different value categories.

Other firms also assign ESG ratings to specific funds. Morningstar, for example, assigns a certain number of “globes” (5 is the best result) so that investors can evaluate the fund’s ESG capabilities. Morningstar has ESG Screener it also allows investors to filter funds according to certain ESG parameters.

One caveat: the globe system and other third-party rankings do not necessarily signal an asset manager’s ESG intentions. Theoretically, an ESG star rating could be a coincidence of a fund, and not due to the manager’s focus.

Investors can use fund databases to identify ESG investments they might like and then research the asset management firm to see how committed the firm is to ESG as a whole.

For investors who are less self-motivated, working with a financial advisor who is well versed in ESG can be the surest way to know that your investments are most in line with your values ​​and align with your overall portfolio and investment goals. Advisors may have more advanced due diligence tools than, for example, a retail investor.


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