The initials ‘ESG’ stand for Environmental, Social, and Governance. When applied to investing, as in taking out ESG funds, in plain English they refer to a sort of “feel-good” way of investing that puts environmental and social issues at its core. In this brief article, we will look at exactly what ESG funds are and how they work.
OPEN AN ESG PORTFOLIONot just fancy words
The term ESG funds is not just a couple of fancy words dreamed up to pique investors’ interests in investing; there is a specific ESG funds list – in fact, there are several, a couple of which we refer to later in this article.
Some people tend to think that ESG investment funds mean forfeiting something in terms of returns. This is not necessarily the case and in some cases ESG investments can outperform their traditional counterparts. Part of the problem may come from the many different terms used to describe ESG funds, which can cause confusion. They include:
- Ethical investment funds
- Impact Investment funds
- SRI – Socially responsible investing
- Sustainability, or sustainable investment funds
They are all variants of the same concept, but it isn’t surprising that there can be some misinterpretation.
How ESG, SRI, and Impact Funds Differ
To cut through any confusion regarding these variants of ESG funds, the terms refer to how client portfolios are structured and which are more suited to meeting social impact targets. For example:
- ESG funds are concerned with an enterprise’s social and management practices and more traditional financial issues.
- SRI is about making investments around certain ethical guidelines.
- Impact investing is about helping businesses to complete a particular project or design a program to benefit society.
For further clarification, you may find this Investopedia.com article helpful.
How many ESG funds are there?
The global drive towards tackling things like climate change and preserving the environment has had a profound effect on the investment scene. Initially, ESG funds were viewed with suspicion and maybe as something of a passing fad, but that is clearly no longer the case.
The range of ESG investment funds has grown in recent years and continues to do so apace. According to Bloomberg, assets in this relatively new market sector are predicted to reach a value of $53 trillion by the year 2025. Let’s take a look at a few of the top ESG funds you can invest in today.
The Global ESG Select Stock Fund (VEIGX)
This fund focuses on maximising returns through concentrating on businesses that have attractive social and environmental policies. As a rule, around 80% of the assets of this fund are invested in the stocks and shares of enterprises worldwide that comply with ESG criteria, including companies in the emerging markets.
ESG U.S. Stock ETF (ESGV)
The ESGV was set up to track the performance of the FTSE US All Cap Choice Index, an index that is a part of the FTSE Global Choice Index Series. It was created to assist investors in realising their choices of investments with businesses whose products impact society and environmental issues.
ESG International Stock ETF (VSGX)
The VSGX is another of the ESG index funds that track the performance of the FTSE US All Cap Choice Index. The index is weighted upon market capitalisation and comprises small, medium, and large shares in businesses working in both emerging and developed markets on a worldwide basis, but excluding the US.
ESG US Corporate Bond ETF (VCEB)
This fund tracks the workings of the Bloomberg Barclays MSCI US Corporate SRI Select Index. It measures the return on investments of investment-grade U.S. dollar-denominated bonds. However, it doesn’t include bonds with less than one year’s maturity and less than $750 million outstanding.
iShares MSCI USA ESG Select ETF (SUSA)
Another fund that aims to track investments in ESG minded U.S. companies, SUSA employs a screen that filters out businesses with ties in alcohol or weaponry, nuclear power, tobacco, and gambling.
3 trends to be aware of if considering investing in ESG funds
As a rule, ESG investors fall into three broad categories:
- Those interested in investing in companies involved in alternative energy or green issues.
- Those who want to invest in companies that promote diversity, human rights and economic equality issues.
- Investors who prefer to focus on investing in companies that restrict board member salaries and bonuses within ethical limits and that concentrate on the work/life balance of their employees.
Whether we are talking about ESG bond funds, ESG mutual funds, or any other sector of the ESG investment funds market, there are three things you need to keep an eye on that can impact performance. They are:
Climate change issues
Significant progress is being made in climate change. Initiatives like the cap and trade legislation being bandied around in the US would significantly affect non-renewable energy sectors like coal, gas and oil, but would create opportunities for renewable energy sources like solar, wave and wind to thrive and expand.
Equal pay
In the US, only 78% of women get the same pay as men for the same jobs. Investors who feel that the gender wage gap needs addressing can seek increasing opportunities to invest their money in ESG funds, including businesses taking positive action to correct this issue.
Financial compensation of top executives
ESG investors who feel that sky-high executive compensation adversely affects the economy can look to invest in companies taking effective steps to realign executive salaries to a reasonable and justifiable level.
Which are the best ESG funds?
If you are in search of the best ESG funds to invest in, it can be a confusing proposition for the newbie investor. If you would like an ESG funds list to help you make a decision, there are several around – like this one published by Forbes. Another useful source is the Investorschronicle.co.uk website and their article on the best ESG funds by U.K. region.
ESG fund ratings
If you are serious about ESG investment funds and finding the right one to suit your needs and preferences, you might like to take a look at the MSCI.com website. They leverage more than 8,500 businesses (around 14,000 in total, including subsidiaries), and create ESG ratings for about 53,000 multi-asset class Mutual Funds and ETFs worldwide.
*As with all investing, financial instruments involve inherent risks, including loss of capital, market fluctuations and liquidity risk. Past performance is no guarantee of future results. It is important to consider your risk tolerance and investment objectives before proceeding.
