Putting your money to work by investing in socially and environmentally responsible companies is not only the right thing to do, but, as we will find out, it can be incredibly profitable.
What is ESG Investing?
ESG investing (Environmental, Social & Governance) enables ethical investors to channel their capital to companies that demonstrate environmental sustainability, social responsibility, and good corporate governance. ESG investing can be done by investing in specific companies or by investing in some of the new ESG funds.
3 Ways to Start ESG Investing
- Build Your Own ESG Portfolio
- Use a Robo Advisor for ESG Investing
- Invest in an ESG Fund
[Related Article: In-Depth Guide to ESG Investing]
1. Build Your Own ESG Portfolio
Although ESG investing can be complicated, having to wade through the ethical dilemmas in order to emerge with a list of companies you want to invest in, it does not need to be.
The team over at Stock Rover, our review winning stock screener and portfolio management tool, has made ESG investing that much simpler by putting together an in-built portfolio of the best ESG companies in the USA.
The Stock Rover team handpicked the top 20 highest rated companies according to the Environmental, Social, and Governance (ESG) Score.
The screenshot below shows the 20 best ESG companies, and I have combined that with a view that shows the Stock Rover ratings, sorted on Overall Rating Score. This makes it easy to make your individual investments based on company valuation, growth, or even financial strength.
The biggest benefit of using Stock Rover to manage your ESG investing portfolio is that you can track the historical performance of the portfolio and take advantage of the excellent Stock Rover rating system plus the Morningstar research they also provide.
ESG Portfolio Performance
Interestingly, investing in companies doing the right thing ethically is not bad for your investing returns. In the chart above, you can see that the portfolio return for the Top 20 ESG Companies for the previous two years was 40%, compared to a return for the NASDAQ 100 of 36.9% and only 28.5% for the S&P500.
ESG Portfolio Performance 2 & 5 Year Results
|ESG Investment||2 Year Performance||5 Year Performance|
|Stock Rover Top 20 ESG Stocks||+40%||+113%|
|NASDAQ 100 Index||+36.9%||+108%|
5 Year ESG Portfolio Performance
In fact, if we take a look even further back, we can see that the 5-year return for this Stock Rover ESG portfolio was 113%, compared to 108% for the NASDAQ 100 and 77.3% for the S&P500.
Interestingly, some of the best companies in America are pushing hard to improve their ESG profile, so it is not surprising that the ESG portfolio performs well. What is surprising is that ESG companies can outperform the market.
5 Steps to Build Your Own ESG Portfolio
5 Steps to Create a Good ESG Investing Portfolio with Stock Rover
- Sign in to Stock Rover and click on Library
- Select Portfolio
- Search for ESG
- Select “Import Top 20 ESG Companies”
- Select Import
- Related Article: 4 Easy Steps to Build The Best Buffett Stock Screener
2. Use a Robo Advisor for ESG Investing
A Robo Advisor is a computer program or algorithm designed to automate the job of a financial advisor, by automating the buying & selling of Stock’s or ETF’s, and structuring a portfolio based on the investors risk tolerance. These services are provided directly to investors online or via a smartphone app.
Choosing a Good Robo Advisor
Robo Advisors have become mainstream now with offerings from nearly every Wall Street investment banks and brokers. Many offer a form of ESG option or Socially Responsible Investing (SRI) options for investments.
M1 Finance is the only Robo Advisory service in our review that offers commission-free trading for their customers. This means your account will have no management fee whatsoever.
This is very positive for the service, but the question is, how do they make money? They essentially make money from short-term lending of any available cash funds to the overnight inter-bank market, if you utilize their borrowing facility or if you invest in an M1 Plus account. Finally, they will receive some small rebates from liquidity providers for their order flow. This is all quite normal and used throughout the industry.
Another great bonus of this mature service from M1 is that tax-loss harvesting is automatically integrated into the account. This means that when you choose to withdraw funds from your account, the algorithms will consider which securities to sell, giving priority to those that are incurring losses, so they can offset future gains, clever.
3. Invest in an ESG Fund
Many of the large Exchange-Traded Funds are also getting in on the ESG action by offering funds focusing on socially responsible investing. Stock Rover also has a handpicked selection of 9 Top ESG Funds.
Stock Rover allows you to view, manage, and research all of your favorite ESG & Mutual Funds.
Top 10 ESG Investing Funds
1. Vanguard FTSE Social Index Fund Admiral (VFTAX)
The American mutual fund giant Vanguard has offered its FTSE Social Index Fund since 2000. That makes the VFTAX one of the pioneers in social investing.
Vanguard bases the VFTAX on Britain’s Financial Times Stock Exchange 100 Index (FTSE). The VTAX contains low and mid-capitalization stocks they screen for human rights, environmental, and social ESG concerns. Vanguard plans to revise the FTSE Social Index Fund to match up to date human rights concerns in March 2020.
The Vanguard FTSE Index Fund Admiral requires a minimum investment of $3,000. There was a low expense ratio of 0.14% in December 2019.
The iShares ESG MSCI USA Leaders ETF (exchange-traded fund), or SUSL, tracks the investment results of an index of large and mid-cap American companies.
The companies in the SUSL index have high environmental, social, and governance (ESG) ratings. iShares, a subsidiary of the American asset-management giant BlackRock (NYSE: BLK), evaluates the ESG MSCI USA shares for ESG criteria.
Stocks held by the iShares ESG MSCI USA Leaders ETF include such market leaders as Alphabet, Microsoft, Johnson & Johnson, Visa, the Walt Disney Company (NYSE: DIS), and Procter & Gamble.
The iShares ESG MSCI USA Leaders ETF offers a high margin of safety because it invests in lucrative; and well-established American brands, such as Disney, Intel, and the Home Depot (NYSE: HD).
3. Pax Ellevate Global Women’s Leadership Fund (PXWIX)
Pax World Funds allows woke people to “invest like a feminist.” Pax World bases its funds on the premise “that research shows companies perform better with more women in leadership roles.”
They base the Pax Ellevate Global Women’s Leadership Fund on the Impax Women’s Leadership Index. The Impax Leadership is an index of companies with the best for appointing women to leadership roles.
The Pax Ellevate Global Women Fund invests in companies that promote female leaders and work for gender equality. The Pax Ellevate Fund is fossil-fuel free and meets other ESG standards.
The Pax Ellevate Fund allocates 59.2% of its funds to US socks, 31.1% of its money to non-U.S. stocks, and 9.8% of its assets to exchange-traded funds (ETFs). They allocate around 62.5% of Pax Global Leadership’s funds to North American markets.
4. Fidelity U.S. Sustainability Index Fund (FITLX)
The FITLX from American mutual funds giant Fidelity invests 80% of its funds in mid to large-capitalization US companies with high ESG ratings.
Major holdings in the Fidelity U.S. Sustainability Index Fund include Microsoft, Alphabet, Johnson & Johnson, Visa, Procter & Gamble, MasterCard, Disney, Intel, and Verizon Communications (NYSE: VZ). The big advantage of the FITLX is that there is no minimum investment amount.
The iShares ESG MSCI USA ETF tracks an index of American companies that meet certain ESG characteristics. iShares, a subsidiary of BlackRock, seeks to get a similar risk and return to iShare’s MSCI UA Index while promoting sustainability.
The iShares ESG MSCI USA ETF uses a variety of complex criteria to pick stocks. Those criteria include ESG quality, ESG coverage, the MSCI ESG Rating, the MSCI ESG Quality Score, and the MSCI Weighted Average Carbon Intensity.
BlackRock charges a 0.15% fee for participating in the iShares ESG MSCI USA ET.
6. Xtrackers MSCI USA ESG Leaders Equity ETF (USSG)
The Xtrackers MSCI USA ESG Leaders is an exchange-fund (ETF) based on an index of large-cap US stocks. Xtrackers picks stocks with high ESG ratings for the MSCI USA ESG Leaders.
Stocks on the MSCI USA Leaders index could include Microsoft, Alphabet, Johnson & Johnson, Visa, MasterCard, Intel, Visa, The Walt Disney Company, and Verizon. The MSCI USA ESG Leaders Equity ETF is one of many ETFs and Mutual Funds from DWS Group.
7. SPDR S&P 500 Fossil Fuel Reserves Free ETF (SP5F3UP)
They base this exchange-traded fund on an index of S&P (Standard & Poor’s) 500 companies that do not own fossil-fuel reserves.
The companies in the SPDR S&P 500 Fossil Fuel Reserves Free ETF do not own any oilfields, coal mines, or natural gas wells. Stocks in the SP5F3UP include Berkshire Hathaway (NYSE: BRK.B), Alphabet, Apple (NASDAQ: AAPL), JP Morgan Chase & Company (NYSE: JPM), and Facebook Inc. (NASDAQ: FB).
The ESG potential of the SPDR S&P 500 Fossil Fuel Reserves Free ETF is questionable. One company it owns Berkshire Hathaway owns pipelines that move oil. Sustainalytics Inc. gave Berkshire Hathaway a high ESG risk score of 46 on January 1, 2020.
Many people will not consider the SPDR S&P 500 Fossil Fuel Reserves Free ETF an ESG investment because it owns Berkshire Hathaway.
The team behind the Parnassus Endeavor Fund Investor fund uses ESG criteria as one factor in its stock-picking process. The other criteria the Parnassus portfolio managers use include low share prices, quality management teams, and long-term competitive advantages.
Parnassus’s managers consider companies with outstanding workplaces and their refusal to invest in fossil fuels as ESG criteria. The advantage to Parnassus is that it holds stocks other ESG funds do not.
Parnassus’s 2020 holdings include The Gap (NYSE: GPS), FedEx Corp (NYSE: FDX), and Cisco Systems Inc. (NASDAQ: CSCO). The ESG criteria of some of Parnassus’s holdings are questionable.
FedEx uses hundreds of airliners and thousands of trucks that burn fossil fuels, for instance. The Gap sells clothing that overseas sweatshops could manufacture.
The PARWX has a minimum initial investment of $2,000, so it is very expensive.
9. Vanguard ESG U.S. Stock ETF (ESGV)
The Vanguard ESG excludes some stocks of companies that do not meet the standards of the UN global compact. Vanguard ESG also excludes some stocks in companies that do not meet diversity criteria.
The Vanguard ESG tracks the performance of the FTSE US All Cap Choice Index. Vanguard’s team evaluates stocks in that index for ESG criteria and picks shares for the ESG.
The Vanguard ESG’s major holdings include Apple, Microsoft, Alphabet, Amazon (NASDAQ: AMZN), Facebook, Visa, JPMorgan Chase & Co., Visa, Procter & Gamble, MasterCard, and Intel. The Vanguard ESG owns some companies with questionable ESG criteria.
Amazon relies on fossil-fuel burning trucks, airplanes, and vans to deliver its products, for example. Critics accuse Apple of manufacturing phones and other products in Chinese sweatshops.
The MSCI KLD 400 Social Index is one of the oldest Socially Responsible Investing (SRI) indexes formed in May 1990. The iShares MSCI KLD 400 Social ETF (DSI) is an exchange-traded fund based on the KLD 400 Index.
The goal of iShares MSCI KLD 400 Social ETF (DSI) is to give investors exposure to socially responsible US companies. The major iShares MSCI KLD 400 Social holdings include Microsoft, Facebook, Alphabet, Visa, MasterCard, Procter & Gamble, Intel, Home Depot, and the Walt Disney Co.
Many people will question the ESG criteria of the MSCI KLD 400 Social because of some of the companies it holds. The Home Depot is a big box store that sells lumber and chemicals, for instance. Critics accuse the Walt Disney Co of paying low wages at its theme parks and poor treatment of employees.
ESG Investing Summary
So there we have three different ways to get started in ethical ESG investing. The lowest amount of effort is to invest in one or more of the ESG focused funds. You could also use a robo advisor to structure and manage your trades. Finally, you can get more hands-on and select the specific companies you want to invest in.