Are you interested in investing based on your personal principles? If so, you might want to consider sustainable investing.
This investing strategy has attracted some big-name investors in recent years. For example, Bill and Melinda Gates—and a consortium of other well-known investors—launched the $2 billion green energy Breakthrough Energy Ventures fund, whose goal is to invest in technologies to reduce greenhouse gas emissions by at least half a gigaton.
In the past, some investors have avoided sustainable investing strategies for fear of sacrificing performance. Yet numerous studies into this topic have not concluded that incorporating sustainable investing factors results in a negative impact on performance.
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 environmental, social, and corporate governance (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 (see graphic below) 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 Wilderhill Clean Energy (PBW), and First Trust Nasdaq Clean Edge Green Energy Index Fund (QCLN).1 Some of the largest clean-energy mutual funds by net asset value are Pax Global Environmental Markets Fund (PGRNX), Green Century Balanced (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), including an independent board and audit committee that seek to protect shareholders over management.
You can search for sustainable investments on Fidelity.com 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 growth of sustainable investing
Sustainable investment opportunities have grown dramatically in recent years. Currently, more than 1,400 asset managers and asset owners from over 50 countries representing $59 trillion of assets have signed on to the United Nations sponsored Principles of Responsible Investing (PRI), a framework created to support the integration of ESG considerations into the investment process.
This growth is driven by a variety of factors, including increasing recognition that ESG issues are financially material, concerns about the impact of companies focusing too much on short-term performance at the expense of long-term goals, and the desire to align company objectives with values of investors, clients, and beneficiaries. Indeed, Fidelity fund managers often weigh some ESG factors when investing.
The growth in ESG investment options has also been in response to increasing demand for such opportunities. According to a 2015 survey by the Morgan Stanley Institute of Investing, 71% of individual investors were interested in sustainable investing.
Perhaps not surprisingly, demand for sustainable investment opportunities also appears to be particularly high among younger investors. More than 8 in 10 millennials said they were interested in sustainable investing, according to another survey by Morgan Stanley.2 Given that millennials are expected to have $19 trillion to $24 trillion in assets by 2020, sustainable investing may have some wind at its back.3
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 based, 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
Sustainable fund performance tends to skew positive. Recent research shows there is no systematic performance penalty associated with sustainable investing or ESG funds. In fact, 54% of funds were in the top 2 performance quartiles of their respective Morningstar category in 2017 (see table below).
As with any investment, costs should always be an important consideration. Expense ratios for ESG funds have been found to be similar to those for traditional mutual funds within similar categories (see graphic below).
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. 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, in addition to assessing it relative to an alternative energy benchmark index such as 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:
|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: ETF.com, Morningstar, as of June 27, 2018. The mutual fund list excludes American Funds Washington Mutual, which does not meet Fidelity’s definition of socially conscious investment strategies.|
Fidelity now offers 3 relatively low-cost ESG index funds5: Fidelity US Sustainability Index Fund (FENSX), Fidelity International Sustainability Index Fund (FNIYX), and more recently the Fidelity Sustainability Bond Index Fund (FNASX), in addition to the Fidelity Select Environment & Alternative Energy Portfolio (FSLEX).5 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.
If you want to find these types of investments on your own, you can do so on Fidelity.com via the stock, ETF, and mutual fund screeners. For example, 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.
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