What is an ESG mutual fund? Here’s how to invest in fair and sustainable businesses

Climate change. Inequality. Troubles. There’s a lot to consider in today’s world and you might find yourself wanting to invest only in companies that aim to do business in an environmentally sustainable, socially fair and ethical way.

Or maybe you just want to invest in companies that are taking steps to protect their bottom line from the very real business risks posed by climate change or social inequality.

Either way, you’re probably not looking forward to losing money. So you want to make investments that offer a competitive return over time.

This is a balance that so-called ESG mutual funds try to strike.

The acronym ESG stands for environmental, social and governance issues – all of which face public companies and their stakeholders, which include investors, customers, employees and the communities where a company operates.

Thanks to growing demand, there are many more ESG funds today than ten years ago. A recent survey – conducted by JUST Capital and partner organizations – found that “Americans overwhelmingly support public disclosure of the human capital and environmental impact metrics of America’s largest companies, and approve of federal action to demand a standard disclosure”.

Here’s what you need to know before investing:

Rather than sort through individual companies’ commitments to ESG objectives, most investors will outsource this task to a ESG UCITS.

But ESG funds can differ in big and small ways. And not all of them correspond to your greatest environmental, societal or governance concerns.

“ESG means so many different things to so many different people,” said Alyssa Stankiewicz, sustainability analyst at Morningstar Research Services LLC.

So before investing in an ESG fund, read at least the main investment strategy page in the fund’s prospectus to see what the investment priorities are, recommends Stankiewicz.

Also be aware that there is no single set of ESG metrics that every fund manager evaluates a company against – or that companies use to assess themselves when making ESG promises.

Furthermore, managers will not necessarily give the same weight to the three components of ESG when deciding what to include in their portfolios.

Environmental concerns are likely to outweigh social concerns. There are more widely accepted metrics and better availability of data on environmental concerns than on social concerns, Stankiewicz said. “I think it has to do with different markets, cultures and regulatory environments.”

She further noted that of all the potential social issues, board diversity is probably the most widely accepted metric, but even then, what defines diversity and what the goals are may vary depending on the market.

On March 21, the Securities and Exchange Commission is expected to propose rules that would standardize climate change disclosures for U.S. companies and establish accountability for those who fail to meet their climate change commitments.

“We expect more ESG proposals in the coming years that will address social justice and governance as well as asset managers making ESG claims,” ​​said Jaret Seiberg, chief executive of Cowen Washington Research Group, in a statement. customer note. “The idea is that standardized disclosure would benefit investors by allowing them to compare the performance of public companies.”

Just because a fund’s portfolio takes environmental, societal and governance concerns into account doesn’t mean investors have to sacrifice profit.

“Most ESG funds look at data from the perspective of mitigating the impact of environmental and social risks on a company’s bottom line,” Stankiewicz said.

In fact, many ESG funds have shown they can deliver competitive returns, with just over 50% ranking in the top half of their peer groups last year, according to Morningstar.

Ranking ESG funds from best to worst depends on your most important metrics. But being one of the best ESG funds according to the Morningstar standard means that ESG concerns play a central role in fund strategy and fund manager decisions. In other words, ESG is not just a marketing slogan to which we lend only words. And that means the prospectus is explicit about the ESG objectives of the fund.

Second, Morningstar also takes into account a fund’s performance and potential to outperform in its categories – such as large-cap, mixed or taxable bonds, etc.

Its latest list identifies 17 funds that stand out for their level of ESG commitment. Of these, 12 generated returns in the top half of their peer group last year. And four of them stood out for their ESG commitment both at strategy and manager level: Parnassus Core Equity (PRBLX), Calvert Equity (CSIEX), Pax Global Opportunities (POGOX) and TIAA-CREF Core Impact Bond ( TSBIX).

Dolores W. Simon