Investing with an Environmental, Social and Governance Focus – ESG and SRI Investments

ESG stands for Environmental, Social, and Governance. They are areas where we can review a business for quality and lead us to a decision whether or not to purchase their stock. In 1998 there was a study that showed improved social awareness and corporate treatment of employees and shareholders did not limit a company’s ability to achieve financial success.(1) The positive environmental, social, and governance attributes of an organization actually maximized productivity. In 2011 a published paper in the Journal of Financial Economics, written by Alex Edmans, found that the stock of “(Forbes)100 Best Companies to Work For” with positive ESG standards outperformed their peers’ stock from 1984-2009 (past returns are no guarantee of future results). After these studies, there was an increased interest for firms to offer investment products that utilized ESG factors when selecting stocks. Many think these factors will continue to be incorporated into traditional stock selection methods going forward.

  • Environmental issues – Climate change, carbon emissions, air/water pollution, energy efficiency
  • Social issues – Labor standards, supply chain management, health and safety, gender and race diversity
  • Governance issues – Board and executive compensation, lobbying, business ethics, political contributions

SRI stands for Socially Responsible Investing and it focuses on sustainable, socially conscious (green), or ethical investing. This type of stock selection attempts to find companies that promote a healthy environment, consumer protection, human rights, and diversity. There may be a stock filter placed on a basket of stocks and bonds (like a market index) to specifically exclude “sin” companies; such as those who promote alcohol, tobacco, fast food, gambling, pornography, weapons, abortion/contraception, animal testing or military products. SRI would fall under the “S” in the ESG category of investing.

If it is important for you to invest in companies that offer beneficial characteristics like those above, you should consider some of the following mutual funds. Review our post on how to select mutual funds here and see if these meet your criteria and risk tolerance. Please note that details mentioned below are as of the date of this post and are subject to change.

1) Calvert US Large Cap Core Responsible Index Fund (Y Share) – CISYX
This fund is focused on buying stocks from the United States that are large in size. See more about the Calvert Principles for Responsible Investment here.  There are over $950 million assets in this fund with over 733 stock positions. The net expense ratio, or fee, is 0.29% per year, and the minimum investment is $10,000. The largest sectors currently include Technology, Financial Services, Healthcare and Consumer Cyclicals.

2) Parnassus Core Equity Fund – PRBLX
The fund is concentrated with only 40 holdings that are large US firms. The investment focus is on finding companies with strong competitive advantages and sustainable growth over the long term. With over $9 billion in assets, the fund charges a 0.87% annual fee and requires a $2,000 minimum investment. Currently, its largest sectors include Technology, Healthcare, Financial Services, and Consumer Cyclicals. More details on their investment process can be found here.

3) iShares MSCI KLD 400 Social ETF – DSI
The fund seeks to track the holdings of the MSCI KLD 400 Social Index. Details about that index’s methodology can be found here.  The index is meant to represent a broad US stock basket of large, mid, and small companies. The portfolio will contain 400 stocks with its current top sectors including Technology, Consumer Cyclicals, Healthcare, and Financials. The holdings will only change if the index’s holdings change. The annual fee is 0.50%. There are more than $900 million in assets in the fund and today (October 23, 2017) you can buy one share of the ETF for less than $100. (ETFs trade intraday and only require the initial investment to be at least the cost of 1 share)

4) Vanguard FTSE Social Index Investor Class – VFTSX
This portfolio of stocks looks at US large and mid-sized companies with favorable social, human rights, and environmental criteria. The annual fee is only 0.22% with a minimum investment of $3,000. With more than 400 stocks in the portfolio, the fund manages more than $3.5 billion. More information on the fund can be found here. The top sectors within the fund are Technology, Financials, Healthcare and Consumer Goods.

5) Eventide Gilead N Share – ETGLX
This fund is focused on investing in small to mid-sized growth companies in the healthcare and information technology sectors. The fund has more than $1.3 billion in assets, an annual fee of 1.40%, and a required minimum investment of $1,000. A description of the fund’s investment process can be found here.

There are many new funds in this area. I’ve named a few companies who have new ESG funds below. They don’t have enough history to analyze their track record yet, but may be ones to watch:
1) Fidelity
2) Oppenheimer
3) FlexShares

Always read the prospectus before investing and find out what fees you will incur with the purchase or sale of any investment. Here is the infographic on how to pick the best fund for you! Knowledge is Key! Don’t be afraid to call the fund company and ask questions about how the fund operates and manages its portfolio.

(1) 1998 Robert Levering and Milton Moskowitz had reviewed Forbes Top 100 Companies List. They took this list and reviewed the companies for corporate social responsibility and financial performance.


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