Twenty years ago, when someone asked for my guidance on choosing an environmentally friendly investment strategy, there were very few choices. One or two companies offered “green” mutual funds that invested in solar and water. These funds did attract new money, yet rarely gave the diversification that traditional investment funds provided. The expense ratios and costs were above a traditional stock fund, and performance lagged. As time went on, institutional money managers attempted to provide strategies for clients that screened out tobacco or oil stocks, and offered “to do their best” at avoiding other companies that might have a negative effect on the global climate. Yet if you read the entire prospectus on the fund, you’d find that only a small percentage of the overall investments had to meet that criteria. Outside of that small percentage, the fund manager could actually buy whatever he or she wanted.
Nearly two decades later, environmentally friendly funds are more commonly known as socially responsible funds or sustainable funds. The keywords – environmental, social, and governance (ESG) – have become part of the investment lingo. Many investment funds also now avoid weapons, animal cruelty, fossil fuels, nuclear power, alcohol, and gambling. These strategies now provide a much improved and diversified approach to investors seeking environmental and corporate governance standards that align with their social values.
There are now over 500 mutual funds and exchange traded funds (ETFs) classified as socially responsible investments. Over $20 billion moved into these funds in 2019, nearly four times as much as 2018. Consumers are seeking investment strategies specific to their core values, beliefs, and lifestyle. Many companies are adjusting their corporate culture to be greener and more responsible. Investors can now search for these funds online and the investment strategies being offered are broader and more diversified than before. If you would rather hire someone to do the homework and invest for you, our firm provides an ESG portfolio represented by many of these ETFs.
Environmental investing now includes many different aspects to conserve and protect our surroundings. Besides solar and water, air quality and emissions are examined when picking companies to invest in. The amount of energy use, natural resources, and land use are examined and compared to make decisions about their qualifications for being green. Waste management and hazardous materials usage are reviewed before they are added to an environmentally friendly portfolio.
Socially responsible investing has brought to the forefront what kind of relationships a company has with its employees and community. These objectives are reviewed to meet the specific criteria around production quality, safety, and labor standards. Is the company having a positive impact on its local community? Other factors that are reviewed include health care and educational opportunities that are being offered. All of these can impact a fund’s decision process on what to include in their investment portfolio.
Investment managers now have more information to make decisions on corporate governance policies that could potentially lead to improved results. These include standards for company leadership and shareholder rights. Portfolio managers can compare accounting and tax transparency of a company and can review if they are following ethical business practices through various reports. More companies are voluntarily providing information and adapting their risk controls to improve these standards and be a part of the responsible accounting community.
Companies that are paying more attention to these core values are performing well and providing investors with returns they can believe in. It is always good to pay attention to an ETF or mutual funds investment strategy and approach, read the prospectus, making sure it fits your personal goals. Besides being socially responsible, look for diversification and low expense ratios when picking investments. Going green has become easier as more companies embrace these principles. As financial mentors, we are always looking out for the best interests of our clients and helping them plan an amazing life in retirement. Let’s start planning an investment strategy that meets your core values, needs, wants and wishes in life.