Investing based on your principles

Thinking about investing using environmental, social, and governance factors?

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Are you interested in investing based on your personal principles? If so, you might want to consider sustainable investing.

In the past, some investors have avoided sustainable investing strategies for fear of sacrificing performance. Yet numerous studies have not concluded that incorporating sustainable investing factors results in a negative impact on performance. Additionally, the growth in sustainable investing vehicles has been substantial, providing investors with an increasing number of opportunities to potentially find investments that align with their goals.

A February 2020 report from Morningstar found that the number of sustainable funds reached 303 open-end and exchange-traded funds by the end of 2019, including both active and passive funds across equities, bonds, alternatives, and money markets (see Sustainable funds by category chart). Additionally, the number of conventional funds (i.e., non sustainable funds) that have stated they "consider" environmental, social, and corporate governance (ESG) factors surged to 564, up from 81 in 2018.

Growth in flows into sustainable funds have been impressive as well—in particular in the US. "There was a nearly fourfold increase in assets that flowed into sustainable funds in the United States in 2019," according to the Morningstar report.

Here is a closer look at what sustainable investing entails, along with a few opportunities to consider.

What is sustainable investing?

Sustainable investing is known by many names. Among them: socially responsible, ethical, impact, and principles-based investing.

According to MSCI, this investing approach looks at a company's ESG practices as well as its overall investment decision-making process. While such an investing approach isn't new, its definition and objectives have evolved over the years—from avoiding certain investments (so-called "sin stocks," such as tobacco, firearms, alcohol, and casinos) to a more holistic approach, based on ESG factors, which include:

  • Environmental impact—An environmentally friendly investing objective can include companies that produce renewable and sustainable energy, enhance energy efficiency, source raw materials using eco-safe methods, use little or no hazardous chemicals in their production process, limit waste, and prioritize recycling. There are many examples of these types of investments. For example, some of the largest clean-energy ETFs, by net asset value, are the iShares Global Clean Energy ETF (ICLN), Invesco Solar ETF (TAN), and ALPS Clean Energy ETF (ACES).1 Some of the largest clean-energy mutual funds by net asset value are Pax Global Environmental Markets Fund (PGRNX), Green Century Balanced Fund (GCBLX), and New Alternatives Fund (NAEFX).1
  • Social issues—Positive social investing objectives focus on companies that consider the impact upon all stakeholders, such as seeking gender equality, providing healthy working conditions and lifestyles, addressing wealth inequality, and showing a commitment to charitable endeavors, among other factors. The largest fund by net assets that focuses on gender diversity is the SPDR SSGA Gender Diversity Index ETF (SHE).1
  • Governance quality—Strong corporate governance systems entail having policies and principles that address potential conflicts of interest among stakeholders (e.g., managers implementing policies that benefit themselves, rather than shareholders), and including an independent board and audit committee that seek to protect shareholders over management.

Something to consider when evaluating opportunities based on ESG criteria is what characteristics actually qualify something for this type of investment. Simply because a company states their goal is to reduce carbon emissions, for example, that does not mean that align with ESG goals (or that the company will actually follow through with reducing their carbon footprint). You can search for sustainable investments on using our stock, ETF, and mutual fund screeners, based on environmental, social, and governance characteristics. When considering these types of investments, you may want to evaluate their potential impact on your portfolio's diversification, due to the application of ESG filtering criteria and the narrowness of certain ESG fund mandates.

The case for ESG investing

Aligning your principles with your investments
One of the primary reasons to consider an ESG investing strategy is an attempt to match your personal beliefs with your investments. Moreover, a company that focuses on ESG factors can signal operational efficiency and lower costs, reduced environmental liability, opportunities for low-carbon revenue sources, effective management of human capital, reduced risks related to product/service safety, opportunities for an expanded customer base, financial and operational decisions that best serve shareholders, reduced risk from reputational damage or weak financial controls, and well-managed operations and costs in the face of regulatory changes.

Performance vs. peers
Some recent research shows there is no systematic performance penalty associated with sustainable investing or ESG funds. Morningstar's February 2020 sustainable investing report found that two thirds of sustainable funds finished 2019 in the top half of their respective categories (including 35% in the top quartile). Looking at the trailing annualized 3-year returns, 40% of sustainable funds finished 2019 in the top quartile of their Morningstar categories, and two thirds placed in the top half.

On-par expenses
As with any investment, costs should always be an important consideration. Several studies have determined that expense ratios for ESG funds have been found to be similar to those for traditional mutual funds within similar categories.

Of course, there is variability in average costs within categories as well as the range of averages across categories (as well as variability in return, both within and across categories), as measured by expense ratios, highlighting why it’s important to evaluate each investment opportunity on its own merit and, perhaps more importantly, to determine whether an investment is right for you. Always be sure to consider your investment objectives, risk constraints, time horizon, liquidity needs, and tax situation.

Another caveat when assessing these types of investments is that there is not as much historical performance data for ESG funds compared with, say, the broad market. For this reason, the research and conclusions drawn from sustainable investing may not be as profound. Additionally, the classification of a sustainable investment strategy has shifted over time (think “sin stocks” versus ESG factors), making measurement and comparisons somewhat complicated.

Moreover, just because an investment is defined as ESG, that doesn’t mean it meets your definition or requirements. If you are looking for a particular type of sustainable investing strategy, you may need to search for investments that match the factors that are important to you. For example, if you are primarily interested in green energy investments, and would like to invest in an ETF or mutual fund, consider the objectives of the fund as well as evaluate the holdings of the fund to see if the components actually meet your definition of an ESG investment. You may also want to assess the fund relative to an alternative energy benchmark index. Some of the most popular benchmarks in this space are the S&P Global Clean Energy Index (SPGTCLEN), NASDAQ Clean Edge Green Energy Index (CELS), or World Alternative Energy Index (WAEXPDC).

How to find sustainable investing ideas

A large and growing number of mutual funds and ETFs with a socially responsible investing mandate are now available—in addition to individual stocks of companies that would qualify as an ESG investing candidate. For example, some of the largest socially responsible ETFs and mutual funds by net assets are:

ETFs Mutual funds
iShares MSCI KLD 400 Social Index Fund ETF (DSI) Parnassus Core Equity Fund (PRBLX)
iShares MSCI USA ESG Select ETF (SUSA) Parnassus Endeavor Fund (PARWX)
iShares MSCI ACWI Low Carbon Target (CRBN) Vanguard FTSE Social Index Fund (VFTSX)
Invesco Solar ETF (TAN) TIAA-CREF Social Choice Fund (TICRX)
SPDR SSGA Gender Diversity Index ETF (SHE) Ariel Fund Equity Fund (ARGFX)
Source:, Morningstar, as of September 22, 2020. The mutual fund list excludes American Funds Washington Mutual, which does not meet Fidelity’s definition of socially conscious investment strategies.

Fidelity's ESG index funds now include Fidelity US Sustainability Index Fund (FITLX), Fidelity International Sustainability Index Fund (FNIDX), Fidelity Sustainability Bond Index Fund (FNASX), Fidelity Select Environment & Alternative Energy Portfolio (FSLEX), and the recently launched Fidelity Women's Leadership Fund (FWOMX). The latter is an actively managed, US equity fund that invests primarily in companies that prioritize and advance women’s leadership.2 You can see the holdings of each of these funds by going to the fund snapshot page and selecting "View holdings" to help assess whether the investments match your sustainable investing criteria. This might be accomplished by further researching each individual fund holding to help determine if they match your sustainable investing objectives.

To find ESG ETFs, go to the ETF/ETP Screener, select "Start a screen" and choose "Socially Responsible" to search by the 3 ESG criteria. After you run a screen, your next step should be to determine if it aligns with your objectives and risk tolerance.

If you are interested in ESG investing, but aren't sure how to get started, you may want to consider a professionally managed mutual fund. Even if you are knowledgeable, a professionally managed solution—be it a mutual fund or ETF—is generally a good way to gain ESG exposure, given the research intensity and inherent risks of ESG investing. Either way, with a plethora of choices, it’s increasingly possible for you to invest based on your principles.

Next steps to consider

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