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ESG funds have become more popular

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Not all ESG funds are as ‘green’ as you might think

There are more than 550 ESG mutual funds and exchange-traded funds available to US investors, more than double what was available five years ago, according to Morningstar.

“An individual investor has much more [ESG options] and can build a portfolio in ways they couldn’t 10 years ago,” Michael Young, head of education programs at the Forum for Sustainable and Responsible Investing, told CNBC. “Almost all [asset] category that I can think of has a fund option, so we’ve come a long way.”

But fund managers can be to varying degrees of rigor when investing your money, which means the environmentally focused fund you’ve purchased isn’t necessarily as ‘green’ as you might think. .

Here’s an example: some fund managers may “integrate” ESG values ​​when choosing where to invest money, but this strategy may only play a supporting role, not a central one. Conversely, other managers have an explicit ESG mandate that forms the backbone of their investment decisions.

But investors may not know the difference between these approaches.

The Securities and Exchange Commission proposed rules in May, this would increase transparency for investors and make it easier for them to select the ESG fund most in line with their values. The rules would also crack down on “greenwashing”, the practice by which fund managers mislead investors about the holdings of ESG funds.

More recently, the Supreme Court in a 6-3 decision in June removed some of the EPA’s authority to curb planet-warming carbon emissions from US power plants. Power plants powered by fossil fuels are the second largest source of carbon pollution in the United States, behind transportation.

How investors can get started in ESG

All of this might leave you thinking: how do I get started? And how can I be sure that my investments really correspond to my values?

According to ESG experts, investors can take a few simple steps.

One way to start is to look at asset manager, which is a good “abbreviation” for investors, according to Align Impact’s Willskytt.

Some companies focus on ESG and have a long history of investing that way — two encouraging signs for people serious about values-based investing, he said.

If you trust the manager, the funds will be more or less solid from an ESG point of view.

Fabian Willskytt

Associate Director of Public Procurement at Align Impact

the morning star note Calvert and Pax, plus four others – Australian Ethical, Parnassus InvestmentsRobeco and Stewart Investors — as category leaders in asset management, according to a Level of ESG commitment rating published in 2020. However, not all of them are aimed at individual US investors.

Six others, including Nuveen/TIAA, ranked one level lower in the “advanced” ESG category.

“If you have confidence in the manager, the funds will be more or less strong from an ESG perspective,” Willskytt said. “Then it’s about finding the flavors that work for you.”

There is, however, a downside. Despite the growth of ESG funds, investors may not yet be able to easily find a fund that addresses a specific issue, depending on the niche. There are many climate-focused funds and broad ESG funds that represent many different value-based filters, for example, but something like an unarmed fund is harder to find, experts said.

Most, 70%, of sustainable funds are actively managed, according to Morningstar. They may have higher annual fees than the current funds in your portfolio, depending on your current holdings.

Investors who want to know a little more about ESG before taking the plunge can consult for free Classes based on the Forum for Sustainable and Responsible Investment.

Use tools to assess how well investments align with ESG

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Investors can also start by browsing a few free mutual fund and ETF databases.

The Forum for Sustainable and Responsible Investment has a database which allows investors to sort ESG funds by categories, such as asset class – for example, stocks, bonds and balanced funds; type of issue and minimum investment.

This list, however, is not exhaustive – it includes the funds of the member companies of the forum. However, the firm’s membership can be a reliable screen for the asset manager’s ESG rigor, Young said.

as you sow is another organization that can help investors find funds that are fossil fuel-free, gender-equitable, gun-free, jail-free, gun-free, and tobacco-free, for example. He maintains ranking of the best funds by category.

An individual investor has much more [ESG options] and can build a portfolio in ways they couldn’t 10 years ago.

Michael Young

Head of Education Programs at the Forum for Sustainable and Responsible Investment

Alternatively, investors can also use the As You Sow website to assess how well their current investments match their values. They can enter a fund’s ticker symbol, which generates a fund score according to different value categories.

Other companies also assign ESG ratings to specific funds. Morningstar, for example, assigns a number of “globes” – “5” being the best score – so that investors can assess the fund’s ESG scope. Morningstar has a ESG filter which also allows investors to filter funds based on certain parameters.

A caveat: the global system and other third-party ratings do not necessarily signal an asset manager’s ESG intent. In theory, a fund could have excellent ESG ratings by accident, not because of a manager’s orientation.

Investors can also use fund databases to identify ESG investments they might like, then research the asset management company to see how committed the company is to ESG overall.

For investors who aren’t as DIY-oriented, working with an ESG-savvy financial advisor can be the surest way to get to know your investments based on your values ​​and fit into your overall portfolio and your investment goals. Advisors may have more advanced screening tools at their disposal than a retail investor, for example.

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