By Richard Eisenberg
Advice for ESG investing
So, before putting a dime into an ESG fund or ETF, read its prospectus and disclosure materials to see how that firm defines ESG. If you plan to buy a particular stock for ESG reasons, read its annual report and website to learn more about whether its values align with yours.
Conversely, remember that just because a company is socially responsible, that doesn’t necessarily make it a good investment.
Investing this way also can mean paying steeper fees than what you would pay to own traditional mutual funds and ETFs. In their Harvard Business Review article, Picker and King wrote that ESG funds typically charge fees 40% higher than traditional funds. That’s not necessarily a reason to avoid investing in these funds, but it is something to consider when gauging your potential returns.
And that leads to the big question you may be wondering: Will I earn a better return with ESG funds and ETFs than with others? Possibly.
“There’s been an enormous amount of research that’s been done, and it shows unequivocally that you do not give up financial returns when you invest with your values,” Firbo said on my podcast. “In fact, you can meet or even exceed the returns that you see in non-sustainable investing.”
The key word there is “ can .”
A rough 2022 for many ESG funds
Many ESG funds have had a rough 2022. Partly, that’s because they often don’t own any, or many, oil company stocks; that sector has performed well this year. Partly, it’s because sustainable funds are often big owners of tech stocks, a sector that’s largely been clobbered lately.
According to Morningstar , a fund and ETF research firm, 65% of sustainable U.S. stock funds are at the bottom of their category rankings this year. But over longer periods, most U.S. stock ESG funds have been in the top half of their categories.
The current trend toward ESG investing, however, could help boost potential returns. “As more investors demand socially responsible companies to be included in their portfolios, you could see a little extra push on those stocks as those stocks become in demand,” Savage said.
Willing to potentially sacrifice returns?
Regardless, you may be willing to sacrifice potential returns and accept higher fees in exchange for the feeling you’d get by investing with your heart as well as your wallet.
In fact, a 2021 Million Dollar Round Table survey found that 34% of Americans who use financial advisers said they were willing to accept lower investment returns if they could incorporate their personal beliefs into their portfolios.
For help assessing the climate and social impact of ETFs, mutual funds and 401(k) plan investments, the As You Sow nonprofit offers a free online analytic tool. There’s also Carbon Collective, which has a three-step questionnaire to let you allocate funds to one of its “climate-forward portfolios.”
And Savage suggests considering Newdayimpact.com , which runs six portfolios with assorted sustainable goals that let you focus on your impact priority, from clean water to climate action to animal welfare. Newday donates 5% of its net revenues to nonprofits working in the ESG field where you’ve made your investments, Savage says.
Richard Eisenberg is the former Senior Web Editor of the Money & Security and Work & Purpose channels of Next Avenue and former Managing Editor for the site. He is the author of “How to Avoid a Mid-Life Financial Crisis” and has been a personal finance editor at Money, Yahoo, Good Housekeeping, and CBS MoneyWatch.
More from Next Avenue: