What is loosely called Social Investing is the wave of the future. You should strongly consider investing in them instead of an S&P 500 mutual fund. Companies that pollute, do not treat their stakeholders fairly, or engage in unethical behavior will not survive for long. The public and investors are demanding more and more that firms engage in ESG behavior. An ESG Fund is essentially an S&P 500 mutual fund that filters out any company that is not
- Environmentally Responsible
- Socially Responsible
- Governance Responsible
There are a number of different interpretations that mutual funds use to claim that their ESG funds fulfill the above responsibilities. Therefore, you need to read about what the fund means by this to assure yourself that it is a true ESG fund. However, here’s what these terms should mean, although this is not a complete list:
Environmentally Responsible
This should mean that the firms in the portfolio, minimize greenhouse gas emissions, minimize air and water pollution, manage energy appropriately, and create recyclable packaging for their products.
Socially Responsible
This should mean that the firms in the portfolio respect human rights, exercise fair labor practices, promote diversity in hiring and promotion, insist on fair labor standards in its supply chain, engage in good community relations, and treat their customers fairly.
Governance Responsible
This should mean that the firms in the portfolio engage in good safety and health practices for its workers, are transparent and honest in their financial reporting, have fair and equal compensation practices, are ethical in their business practices, source their materials from fair trade suppliers, and do not engage in anti-competitive behavior.
Table 14.2. Examples of Authentic ESG Funds
ESGs excludes companies that do the following:
- Produce alcohol, tobacco, gambling, and adult entertainment
- Produce civilian, controversial, and conventional weapons
- Produce nuclear power
- Do not meet certain diversity criteria
- Have violations of labor rights, human rights, anti-corruption, and environmental standards defined by UN Global Compact Principles
- Own proved or probable reserves in fossil fuels such as coal, oil, or gas*
*This excludes any company that FTSE determines has a primary business activity in the exploration and drilling for, as well as producing, refining, and supplying, oil and gas products; the supply of equipment and services to oil fields and offshore platforms; the operations of pipelines carrying oil, gas, or other forms of fuel; integrated oil and gas companies that provide a combination of services listed in above, including the refining and marketing of oil and gas products; or the exploration for or mining of coal.
Here are a few examples of BlackRock’s ESG Funds.
BlackRock Advantage ESG International Equity Fund
Invests at least 80% of its assets in equity securities or other financial instruments that are components of, or have market capitalizations similar to, the securities included in the MSCI EAFE® Index.
BlackRock Advantage ESG U.S. Equity Fund (BIRIX)
Invests in a portfolio of equity securities of companies with positive aggregate societal impact outcomes, as determined by BlackRock.
BlackRock Advantage ESG Emerging Markets Equity Fund (BLZIX)
Invests at least 80% of its assets in equity securities or other financial instruments that are components of, or have market capitalizations similar to, the securities included in the MSCI Emerging Markets® Index.
BlackRock ESG Aware Moderate Allocation Index
The BlackRock ESG Aware Moderate Allocation Index is designed to measure the performance of a portfolio composed of equity and fixed income iShares ESG ETFs intended to represent a moderate risk profile strategy with a 60% allocation to fixed income and 40% allocation to equities.
BlackRock ESG Aware Growth Allocation Index
The BlackRock ESG Aware Growth Allocation Index is designed to measure the performance of a portfolio composed of equity and fixed income iShares ESG ETFs intended to represent a growth risk profile with a 60% allocation to equities and 40% allocation to fixed income.
BlackRock ESG Aware Conservative Allocation Index
The BlackRock ESG Aware Conservative Allocation Index is designed to measure the performance of a portfolio composed of equity and fixed income iShares® ESG ETFs intended to represent a conservative risk profile with a 70% allocation to fixed income and 30% allocation to equities.
Buy a Vanguard ESG Fund because the fees are generally lower than BlackRock funds. Research also shows that adding international stocks to a portfolio does not increase returns, nor does adding a greater number of stocks increase the return. My advice is to invest in the FTSE Social Index Fund (VFTAX), a U.S. stock fund that has 500 stocks in it, like the S&P 500 Index Mutual Fund but with an ESG filter.
The United Nations has 17 Sustainable Development Goals that can work as a framework for your investments. Every large American company (and every large company in the world) is now a global company, so the goals of the U.N. have relevance here. You can evaluate how your ESG fund meets each of these goals.