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What Do You Value: A Guide To ESG Investing

Updated: Sep 1, 2021

Environmental Social Government (ESG) funds are investment funds that base their stock picks not only on performance but restrain them to “socially responsible” companies. ESG funds can include a spectrum of potential concerns including companies that fight racial injustice by prioritizing representation of minorities among their employees, or include women in leadership positions, or use climate forward practices, or even companies that do not sell tobacco or marijuana as a product. Seeing companies make choices that align with an investor's value scan often make investors feel much better about their investing because when these funds are run properly investors are profiting when good (generally speaking) business practices are successful.

Unlike investing in other funds where the goal is simply to make the most money, ESG investing brings in the idea of moral and ethical priorities where investors want to invest into funds or businesses which reflect the investor's values beyond just profits. ESG investing is a quickly growing sector of funds, providing evidence that people like the ability to tailor their investments to their values. In the past decade alone the number of ESG funds has quadrupled to almost 400 funds total.

Even more interesting, not all of these ESG funds are new funds; some are repurposed or reused funds now being framed as ESG presumably to increase their popularity. In 2020, an all-time high of 25 funds were repurposed that year to be ESG.

As more and more issues continue throughout the world, everything from racial injustice to visible effects of climate change, more and more investors are motivated to support ESGs. By now most people have an issue that affects them directly in some way that they want to contribute to solving. In addition, ESGs are a great way to support a cause while supporting companies that make an effort to solve a problem.

Even if you only invest in ESG funds it is still important to know what you own. Funds can be branded as an ESG however, depending on your opinions or values they may be investing in a business that you may view as not socially responsible. For example, some ESGs own stakes in Exxon Mobil, a major fossil fuel manufacturer, because in comparison to its competitors it could be considered socially responsible, however, many would still see it as a major contributor to climate change making it in their mind not socially responsible. There is no one-size-fits-all in investing and definitely not in ESG investing.

Parnassus largest and oldest ESG is, in the eyes of most, a true ESG, because it doesn’t allocate any of its portfolio to utilities or energy companies. This allows them to invest more money into companies that work to be more socially responsible. Their three largest sectors are technology, industrials, and financial services. This also means their money possesses far more power. Because Parnassus focuses their energy on the “swing sectors” where companies can choose to be ESG or socially responsible. When they invest in the ESG companies in “swing sectors” they have the most impact. For Morningstar’s pages on Parnassus go here or here

When you research stocks and mutual funds, you can find lots of public data on their earnings, dividends, and more. But what about ESG? It can be hard to find simple metrics across the stock market. Now some firms are stepping up to fill that gap.

For finding specific ESG funds anyone can use Morningstar’s free ESG stock screener. In the screener, you can narrow down the list to the funds that focus on the ESG issue you most value. For example, if climate change is your priority for ESG investing you can filter by a low carbon designation, exclude fossil fuel businesses, or set a limit for their sustainability rating. Both the low carbon designation and sustainability rating are assigned by Morningstar to funds and the fossil fuel exclusion options allow users to remove any company that has a stake in a company that produces oil, natural gas, gasoline, diesel, and plastics. Without this filter, the investor would have to look through 24871 funds.

However, by filtering for funds with a sustainability rating of 5 (the highest rating on the Morningstar scale) reduces the number to 1047 funds.

If you then also filter by the low carbon designation investment option it drops to 613 funds.

Further filtering to by only non-fossil fuel companies leaves just 240 funds.

Exclude thermal coal companies and the number goes down to 234 funds.

Finally, if you were to only allow funds that were sustainable investments by prospectus (meaning they clearly state that sustainability is a major part of their business) then only 38 funds remain.

Thirty-eight is a manageable number of funds to analyze for quality. This filter captures climate as a priority which reflects a significant interest for ESG investors. However, this tool can also be used to filter and exclude alcohol and tobacco companies which is another example of an ESG.

Note of the 38 funds, the progenitor of EGS - Parnassus - the fund that I discussed earlier is in this list. This is not a recommendation, but rather a starting point for more research. Now that you know how to find these funds, go check out what they hold and see if they may be right for you.

Although I mainly focused on filtering for climate change in this post there are many other types of ESGs that reflect issues you most value. Diversity, water quality for beverage companies, human rights protections, or representation of women in leadership positions are just a few examples of possible other ESG values that an investor might want to know about. ESGs will become increasingly crucial in the future as many of these problems are ongoing and by investing in an ESG you are contributing to a solution.

Morningstar’s ESG screener:

Morningstar’s Climate Investing Site:

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