These funds promote societal progress.
Investing with environmental, social and governance, or ESG, issues as a focus emphasizes the concept of sustainability in a portfolio. When you invest in ESG mutual funds, you're backing companies that are committed to following best practices in regard to environmental impacts, social responsibility and corporate governance. The incorporation of ESG metrics in investment management could become an industry standard in the coming years, says Zach Conway, CEO of financial services firm Seeds. "While much of the industry still thinks of ESG as a stand-alone asset class, prudent investors and asset managers instead recognize it as another lens through which to view and assess a company's likelihood of future success." If you're interested in giving back with your investments, here are seven of the best ESG funds for achieving that goal.
Parnassus Core Equity Fund (ticker: PRILX)
If you're looking for an actively managed ESG fund with a large-cap concentration, PRILX could be a good fit. "Parnassus has been incorporating ESG principles dating back to the early 1990s," says David Bolanos, wealth advisor at Wealth Management Group. "The Parnassus Core Equity Fund has outperformed its benchmark, providing strong risk-adjusted returns." This fund, which uses a blend strategy incorporating stocks and bonds, aims for capital appreciation and current income and offers a low Morningstar risk rating. At 0.63%, the expense ratio is well below what you may find with some ESG mutual funds. In terms of performance, PRILX boasts a 10-year trailing return of 13.63% and a five-year average return of 10.72%.
Shelton Green Alpha Fund (NEXTX)
NEXTX may be one of the best ESG funds to buy if you favor a growth strategy. This fund pursues capital appreciation through companies that are considered to be leaders in managing environmental risks and have above-average growth potential, such as Tesla (TSLA) and IBM (IBM). Green Alpha fund manager Garvin Jabusch takes a forward-thinking approach, which has helped drive consistent performance. "Their go-anywhere, 'next economy' investing strategy is focused not only on where the economy is going but where it has to go in light of rapidly changing global circumstances," says Peter Krull, CEO and director of investments at Earth Equity Advisors. Though this fund has a higher 1.34% expense ratio, it has delivered an impressive 16.28% five-year return.
Brown Advisory Sustainable Growth Fund (BAFWX)
BAFWX is one of several ESG funds that invests in mid- to large-cap U.S. companies with a focus on capital appreciation. Krull says this fund targets companies with solid fundamentals and valuations and that follow sustainable business practices. "It's a little more traditional than the Green Alpha fund, so it may be a good entry point for those who are unsure about ESG investing." By the numbers, the Brown Advisory Sustainable Growth Fund splits the bulk of its holdings among the technology, health care and consumer cyclicals sectors. Microsoft Corp. (MSFT) and Alphabet (GOOG, GOOGL) are some of the most notable names in the fund. BAFWX has a slightly higher expense ratio, at 0.73% -- but it's a strong performer, with a five-year return of 17.95%.
iShares MSCI KLD 400 Social ETF (DSI)
Aside from ESG mutual funds, you may also look to ESG exchange-traded funds for sustainable investing opportunities with minimal costs. The iShares MSCI KLD 400 Social ETF is a standout for its low 0.25% expense ratio and consistency in tracking its underlying market benchmark -- the MSCI KLD 400 Social Index. The fund offers exposure to top companies that have positive environmental, social and governance characteristics, such as Facebook (FB), Visa (V) and Intel Corp. (INTC). On a 10-year basis, DSI has returned a not-too-shabby 13.25% to investors. "This could be an effective core holding for ESG-focused investors with a longer-term, buy-and-hold approach," says Ryan Shuchman, partner at Cornerstone Financial Services in Southfield, Michigan.
Calvert Emerging Markets Equity Fund I (CVMIX)
CVMIX may appeal to you if you're interested in ESG funds that look beyond domestic equities. This fund seeks long-term capital appreciation through investments in companies in emerging markets. Celia Cazayoux, senior vice president and senior investment strategist at People's United Advisors, says this fund's strong points include a focus on structural growth opportunities in emerging markets, a commitment to minimizing exposure to companies that don't follow sustainable practices and solid performance since its inception in 2012. "We also like their deep research team and their approach, which focuses on materiality of ESG factors across different industries." The fund has a five-year average return of 7.57% and an average Morningstar risk rating, with an expense ratio of 0.99%.
Vert Global Sustainable Real Estate Fund (VGSRX)
When you think of ESG funds, one potential investment that's easy to overlook is real estate. Sam Adams, CEO and co-founder of Vert Asset Management, says more real estate companies are taking the initiative when it comes to minimizing environmental risks. "Many firms have figured out how to profit from making their buildings greener by using less energy, and green buildings are better for health and well-being," Adams says. VGSRX is an opportunity to ride this "green wave" through exposure to real estate investment trusts, or REITs, that meet ESG criteria. A good option for long-term investors, the fund is broadly diversified across countries and sectors. California-based data center REIT Equinix (EQIX) is the top holding. VGSRX also comes with a relatively low expense ratio of 0.5%.
Vanguard ESG International Stock ETF (VSGX)
VSGX is one of the best ESG funds for gaining exposure to international stocks. Like other Vanguard ETFs, it has a low expense ratio -- at just 0.17% -- making it the most cost-friendly ESG fund included here. As an index fund, the Vanguard ESG International Stock ETF tracks the performance of the FTSE Global All Cap ex US Choice Index. The fund's holdings center on small-, mid- and large-cap stocks in developing and emerging markets that meet Vanguard's ESG screening criteria. Alibaba Group Holding (BABA), Tencent Holdings (TCEHY), Toyota Motor Corp. (TM) and Samsung Electronics (SSNLF) are some of the most recognizable names. Though this is a newer ETF, the 22.8% annual return notched for 2019 could be a sign of promising things to come.
Seven best ESG funds to buy:
-- Parnassus Core Equity Fund (PRILX)
-- Shelton Green Alpha Fund (NEXTX)
-- Brown Advisory Sustainable Growth Fund (BAFWX)
-- iShares MSCI KLD 400 Social ETF (DSI)
-- Calvert Emerging Markets Equity Fund I (CVMIX)
-- Vert Global Sustainable Real Estate Fund (VGSRX)
-- Vanguard ESG International Stock ETF (VSGX)