Sustainable investing

As you may know, I am very concerned with the state of the environment. As such I feel a little hypocritical with my current set of investments which basically has me supporting/funding oil and gas companies and other questionable asset classes as a shareholder.

I’ve been doing a little reading on more sustainable ETF options and things are looking promising. We may not have to compromise ethics for fund performance.

I do think that eventually the stock market will naturally evolve to be made up of more environmentally friendly companies, as more of these companies emerge to battle climate change, but in the mean time I’m trying to figure out where to put my money to align with my ethics.

There is an organisation called US SIF, a forum for sustainable and responsible investment (SRI) whose mission is to “rapidly shift investment practices towards sustainability, focusing on long-term investment and the generation of positive social and environmental impacts”.

Since 1995 the organisation has been preparing a trend report every 2 years based on survey data on the numbers of institutional asset owners, money management firms and investment vehicles using sustainable investment strategies. It also distills the range of significant ESG issues, including climate change, human rights, weapons avoidance and corporate governance, that investors consider.

The trends

The 2018 report shows that out of the 46.6 trillion invested in US professionally managed assets, 26% (12 trillion) are now falling under the environmental, social and governance (ESG) criteria.

This has grown exponentially year on year including 38% growth since 2016 alone!

25% of that 12 trillion is by individual investors.

Current make-up of funds under management

Of the funds still invested in non-ESG areas here is a breakdown of how much money is behind issue areas:

And of the 46.6 trillion in US assets here is the make up in terms of what the funds support. 26% in sustainable funds, 27% in known listed issues and the remaining 47% isn’t specified in the report (at least in as much as I read).

What is driving more sustainable options?

Client demand is the highest reasons why money managers are considering ESG factors, followed by mission, social benefits, returns, risk, fiduciary duty, UN sustainable goals and regulatory compliance.

You can thank millennials for driving this on as they are the main investors demanding these criteria. With millennials set to inherit a £1.2 trillion windfall from baby boomers in the next 30 years, according to a recent study by Sanlam UK, there’s a clear need for the impact investment industry to develop products and services in order to attract and retain next generation wealth.

What are ESG criteria?

Here are the main criteria which make money managers decide if a fund falls under ESG criteria or not along with how much of the funds under management currently fall within those areas.

And in pie chart form

What funds are available to invest in?

There are likely a lot more but here are a few from my initial research. I have not invested in any of these myself yet but once I am earning again I will likely start to funnel more and more of my portfolio into these types of funds.

In Ireland:

Both ESGV and VSGX follow the below criteria

• Specifically excludes stocks of companies in the following industries: adult entertainment, alcohol and tobacco, weapons, fossil fuels, gambling, and nuclear power
• Excludes stocks of companies that do not meet certain standards of U.N. global compact principles and companies that do not meet diversity criteria

In terms of fund make-up, risk, fees and performance here is a snapshot (click the links for the full fact sheet)

ESGV – Vanguard ESG U.S. Stock ETF

• All US companies
• Fees: 0.12%
• Performance: last 1 year 33%, since inception in 2018: 11.5%
• Risk: 4 out of 5
• ESG Morningstar rating: 4 out of 5

VSGX – Vanguard ESG International Stock ETF

• Tracks the performance of the FTSE Global All Cap ex US Choice Index
• Fees: 0.17%
• Performance: last 1 year 23.48%, since inception in 2018: 7.65%
• Risk: 5 out of 5
• ESG Morningstar rating: 3 out of 5

In Canada:

iShares MSCI KLD 400 Social ETF (DSI)

• DSI tracks a market-cap-weighted index of 400 (US only) companies deemed to have positive environmental, social and governance characteristics by MSCI
• Fees: 0.25%
• Performance: last 1 year 30.38%, last 10 years: 12.47%
• Risk: 5 out of 5
• ESG Morningstar rating: 5 out of 5

Vanguard FTSE Social Index Fund (VFTSX) was another one but seems to now be closed to new investors.

If you have funds in the US or Canada, you may be able to make use of this tool which shows how heavily invested in fossil fuels various mutual funds may be.

How does my current portfolio fare?

According to the Morningstar sustainability ratings, my current Irish portfolio isn’t great with only 1-3s out of 5 (5 being the best)

• Vanguard FTSE All-World High Dividend Yield UCITS ETF (VHYL) = 1
• Vanguard FTSE Developed Europe UCITS ETF (VEUR) = 2
• Vanguard S&P 500 UCITS ETF (VUSA) = 3
• Vanguard FTSE Emerging Markets UCITS ETF (VFEM) = 3

You can read more about Morningstar’s ESG investment ratings here.

What about you? Are you considering shifting your portfolio to more sustainable funds? Have you found any you’d like to share? Please let me and other readers know below!