The popularity of impact investing has been growing in the last couple of years. More investors are becoming socially aware and as a result, several EFTs that are in strict adherence to environmental and social governance keep cropping up.
In the last three years alone, more than 50 ESGs have been started with fundraisers targeting segments ranging from international equity to small caps. ETFs have begun competing with open-end funds and it is only a matter of time before they are fully accepted as an investment alternative. EFTs sustainable funds attracted over $2 billion in net flow for the 2018 financial year. This was twice the size of 2017’s total and set the best record for the last decade.
There are currently over 200 ETFs listed around the world. There is still a little bit of confusion as what constitutes socially responsible funds. The confusion is persistent and according to PRI, a UN-backed initiative, more than 56% of the early adopters believe there is no clear definition when it comes to ESGs. According to ETFGI, a London-based investment research firm, their classification system is an attempt to provide precision by organizing the globally listed ETFs into categories.
If you’re looking into a new investing alternative, ETFs can be a great choice. We have compiled a list of the some of the EFTs you could look at.
iShares MSCI KLD 400 Social ETF (DSI)
With this option, you get access and exposure to socially responsible companies in the U.S. You also get the opportunity to access a wide range of stock which has been vetted for positive environmental, social and governance characteristics. The iShares MSCI KLD 400 Social ETF (DSI) currently managing a $1.28 billion in assets. It is also currently the largest passively managed socially responsible fund in the United States. It has been operational for over 12 years which also makes it one of the oldest.
Given the fact that it has been operational for over a decade, the screening process is standard and prosaic. This is not always a bad thing for the discerning investor. As an old-guard, there are companies that are excluded from the socially responsible funds. Such companies include makers of civilian firearms, gambling companies, adult entertainment, and companies that deal with the manufacturer and sellers of tobacco. The MSCI ESG is rated at almost 100% while the Quality score peer rank score is at 98.61 %.
Xtrackers MSCI ACWI ex USA ESG Leaders Equity ETF (ASCG)
This is one of the newest social responsible funds in the market at the moment. The funds debuted last December and just as it implies, it excludes U.S entities. It mixes developed and emerging markets to provide a bigger portfolio for investors. Even with the territory restriction, this socially responsible fund currently holds more than 800 stocks. European and Asian markets contribute up to 87.40% of the weight. The fund is cost-effective and offers a reliable and steady option for investors who want to get into social responsible ETFs.
SPDR SSGA Gender Diversity Index ETF (SHE)
You can’t talk about impact investment without touching on gender equality. Gender equality products have also shown tremendous growth when looking at impact investing. If you want to prove that there is merit in the gender equality investment thesis, you don’t have to look further than SPDR SSGA Gender Diversity Index ETF (SHE). The investment fund is just over three years old and currently manages $235.72 million in assets. It also seeks to track the SSGA Gender Diversity Index. Financial services, healthcare, technology products constitute to 47% of SHE’s investment portfolio. The expense ratio is currently at 0.20% per year.
Global X Conscious Companies ETF (KRMA)
This is another trust that is about three years old. They have a unique and impactful methodology when it comes to meaningful investing. It boasts as being the first ETF of using the Multi-stakeholder Operating System (MsOS). It strives in offering exposure to customers who want to achieve a positive outcome for the key stakeholders that include suppliers, customers, stockholders, local community, and employees. KRMA currently holds 160 stocks. A big portion of the stock is allocated to technology, financial, and health care services. The expense ratio is at 0.43% per year.
Vanguard ESG U.S. Stock ETF (ESGV)
This is one of the two impactful Investing EFs that was launched by Vanguard in September 2018. Observers noted that the launch would lead to an increased interest in the ESG ETF. There is a 0.12% annual fee which could be seen as 87% cheaper than competition options when it comes to strategy. ESGV is very specific to the companies it deals with. It has excluded companies that deal with alcohol and tobacco, adult entertainment, nuclear power, gambling, and fossil fuel.
ESGV has been finding it challenging to attract the right assets. The company has done exceedingly well given the $111 billion in asset management as of 2018.
Vanguard ESG International Stocks ETF (VSGX)
The is the international option for the above-mentioned ETF. It follows the same guidelines with ESGV. Companies that don’t meet U.N. global impact principles are excluded. The fund is currently home to 1940 stocks. It consists of both developed and emerging markets with the later only contributing to 17.60%. The U.K. and Japan contribute up to 29% of the socially responsible funds. The stocks are performing well currently. The expense ratio is at 0.15%
NuShares ESG Large-Cap Value ETF (NULV)
This ETF comes from a premium family of socially responsible funds. The funds are offered by NuShares which is known to be very strict when it comes to the vetting process for companies. There is a thorough screening process so as to avoid companies with controversial practices or industries that have the potential to cause social harm like a firearm manufacturer. As you would expect in most ETFs, this one also heavily focuses on the financial services which make up to 21.4% of the portfolio. Consumer staples and healthcare have a combine of 29%.
What is Sustainable Investment?
Before you can think about putting your money in impact investing, you need to first understand what you’re dealing with. Sustainable investment is a discipline or branch that factors in environmental, social and corporate governance (ESG) in generating long-term and consistent financial returns.
There are several reasons why people would be interested in sustainable investment. It could be as a result of personal values and goals. Most sustainable investors require desire strong financial performance but aren’t purely driven by profit. They believe that the investments can be used to improve the social, environmental and governance practices in place.
Traditionally, sustainable investors have focused on two strategies to grow their portfolio. The first strategy is ESG incorporation. With ESG, there is the consideration of environmental, societal, community, and other governing factors. Community investing, on the other hand, has the sole of financing institutions or projects that server the less privileged both in the United States and overseas. The second strategy involves filing for shareholders resolutions. There is the option of practicing the forms of shareholding engagement put in place.
How Big Is the Sustainable Investing Market Place?
According to a report on US Sustainable, Responsible and Impact Investing Trends, it was estimated that about $12 trillion under management as of 2017. The industry has enjoyed a growth rate of 38% between 2016 and 2018.
Who are the investors?
Those who invest sustainable energy vary. They could range from high net worth individuals to average retail investors. They could also be organizations like universities, nonprofits, religious entities. There are several investment firms that offer different solutions depending on the individual or organization.
How do the funds perform?
This is perhaps the most important question for a potential investor. Sustainable energy investment plans involve a lot of products and assets. It could be alternative investments, cash, and fixed income. Companies that have a strong social corporate responsibility are recommended when it comes to sustainable investment.
Practical Tips to Help You Get Started in Sustainable Investing
The stock market is always going to be risky. You can lose everything within a flash of a second. You can use your money to invest in things that matter most. The same rules apply when it comes to investing in sustainable investing. You need to diversify, look at the risk vs return ratio, and learn when to pick the loses. If you’re just starting out, there are some pointers that could come in handy.
Start with sustainable funds: Some people might refer to them as socially responsible funds. Investing in sustainable funds provides the opportunity to diversify. There is also the opportunity of evaluating the ESG records on your own if you care a lot about the course. There are a couple of investment firms that provide individualized solutions when it comes to sustainable investing.
Diversified funds: This is always going to be recommended regardless of the type of investment. A mistake that most investors make is to buy funds concentrated from a single industry. This is because they want to align the investment choice with their personal values and preferences. Concentrated funds are always going to be volatile.
You can lose all your investments just because you want to invest in a company that directly manifests your aspirations. A diversified portfolio will help in keeping afloat you when the markets are turbulent. You can invest a small portion of your portfolio if you want to try out speculative funds with high-risk potential.
Performance and sustainable: As much as the funds should be reflective of your values, you also need an option that yields returns if you hope of retiring early. You should start by screening for performance before you can look at the other factors. With this strategy, you can focus on those funds that have a history of strong performance with recent returns.
Regular monitoring: You don’t always have to leave everything to portfolio management. Since it is not all about the money, you want to get involved in the process. If you’re doing the management on your own, there should be a system in place to help with the monitoring. You can decide to do it every two weeks or at the end of the month.
To sum it, you don’t need to be an expert in order to get involved in impact investing. You can decide to do it on your own or reach out to an adviser if you need help. It is going to be enjoyable being a sustainable investor whether you’re doing it on your own or through a firm.