ESG mutual funds are starting to pick up steam as we continue to see a global shift in the political and regulatory environment for sustainable investing. The world has come to a point where environment, social, and governance (ESG) risks are impacting GDP growth and corporate profits. A Swiss Re report estimates that climate change could wipe away up to $23 trillion of global GDP by 2050. Hence, global economies and corporations have upped their sleeves to control global warming to 1.5°C.
Investors can do their part by providing companies with funds for best ESG practices. Companies are innovating to find solutions for today’s challenges and create a transparent and bright future. Identifying such companies could be difficult. ESG mutual funds help you in your goal to be a responsible investor without sacrificing performance.
Some ESG funds might be skewed toward climate change while some towards human rights. When selecting the ESG fund, look at its stock screening process to ensure the fund’s objectives are in line with yours. Also, look at the expense ratio and fund performance.
Top 4 ESG Mutual Funds to Buy in 2022
Like other mutual funds, even ESG funds have active and passive funds. I have identified four ESG funds with diverse ESG selection criteria, company exposure, risk-reward, and lower expense ratio.
- Vanguard FTSE Social Index Fund (VFTAX)
- Parnassus Core Equity Investor (PRBLX)
- Alliance Bernstein Sustainable Global Thematic Fund (ATEYX)
- Shelton Green Alpha Fund (NEXTX)
Vanguard FTSE Social Index Fund (VFTAX)
The only passively managed mutual fund on my list is the Vanguard FTSE Social Index Fund. It tracks the FTSE4 Good US Select Index that has a list of ESG filters. The index excludes companies involved in controversial conduct and diversity practices. On the business front, it excludes companies involved in adult entertainment, alcohol, tobacco, weapons, fossil fuels, gambling, and nuclear power.
The fund invests in 492 large and mid-cap stocks, with the top 10 holdings accounting for 34% of its net assets. Its portfolio has significant exposure to technology (34.4%) and consumer discretionary sectors (17%). In simple words, it’s an ESG way to get exposure to the FAAMG stocks.
As the VFTAX fund launched in February 2019, five-year return is not available. Its three-year average return is 13.76% is almost in line with S&P 500 Index (13.85%). The mutual fund has a minimum investment amount of $3,000 and the lowest expense ratio of 0.14% among the other funds on my list.
Parnassus Core Equity Investor (PRBLX)
If you are a risk-averse investor who wants an ESG-compliant portfolio, the Parnassus Core Equity Investor fund is for you. This actively managed fund invests in high-quality U.S. large-cap companies with long-term competitive advantages, sound management, and positive ESG performance.
The fund takes the S&P 500 stocks and filters out companies on several ESG factors. It excludes companies that earn significant revenue from alcohol or tobacco products, weapons, gambling, nuclear power generation, or fossil fuel-powered energy. The PRBLX fund has high exposure to information technology (28%), industrial (14%), and communications sectors (13%).
The active fund managers look to outperform the S&P 500 Index by capturing more of the market upside. Its top 10 holdings account for 43.5% of its net assets, with the largest holdings in Microsoft (7%) and Alphabet (6.4%).
Active management brings a higher expense ratio of 0.82% but it has outperformed S&P 500 Index in three and five–year average return. It is currently underperforming the S&P 500 Index as it excluded fossil-fuel energy stocks from its portfolio. You can get this fund with a minimum investment of $2,000.
Alliance Bernstein Sustainable Global Thematic Fund (ATEYX)
If you want global exposure, the AB Sustainable Global Thematic Fund is for you. It invests in all companies, big or small, within or outside the United States, that achieve the United Nations Sustainable Development Goals. These goals focus on health, climate and empowerment. While maintaining the ESG theme, it filters companies based on earnings growth potential, valuation, and company management quality.
The ATEYX fund has huge exposure to information technology (25.9%) and industrial (23.5%) sectors. Around 60% of its stocks are US-based. Its top 10 holdings account for 26% of its net assets, with its largest holding of 3.27% in Waste Management. The fund’s five-year average return was 16.8%, almost in line with S&P 500 Composite Stock Index.
The ATEYX fund has an overall Morningstar rating of 4 stars among 311 global large-stock growth funds. There is no minimum investment amount for the fund and has a relatively low expense ratio of 0.80% for an actively managed fund.
Shelton Green Alpha Fund (NEXTX)
If your objective is to encourage ESG innovation, the Shelton Green Alpha Fund is for you. It is the most expensive actively managed fund on my list, with a 1.16% expense ratio. Nevertheless, the fund has earned its expense by delivering a 22.6% average annual return in the last five years, outperforming S&P 500 Composite Stock Index (16%).
The fourth quarter of 2021 was the fund’s best-performing quarter because of its ~22% exposure to the energy sector. Some of its top energy holdings are Brookfield Renewable, JinkoSolar Holding, and Vestas Wind Systems.
As per the fund’s prospectus, it invests in green economy companies focused on improving human well-being and increasing economic efficiencies while significantly reducing environmental risks. It also looks for companies with above-average growth potential. That explains its 25% exposure to the technology sector, with Tesla (5.6%) as its largest holding.
Its top 10 holdings account for 40% of its net assets, giving you a well-diversified portfolio. The NEXTX fund has an overall Morningstar rating of 5 stars among 542 mid-cap growth funds. You can invest in this fund with just $1,000.
ESG Mutual Funds: Key Takeaway
There is a myth that ESG investing implies a financial trade-off. Hence, investors avoid investing in ESG funds. But ESG funds have outperformed the market in the long term. The way business practices are heading sustainable investment is the future. This is the right time to buy ESG funds while the market is bearish and hold them for three to five years to get good returns.