By Stan Choe
AP Business Writer
NEW YORK (AP) - It's easier than ever to invest with the goal of helping the environment or society. But easy doesn't mean simple.
The investment industry is unveiling ever-more options that steer money toward companies that are leaders in cutting pollution, pushing for better labor conditions or protecting shareholders' interests. The mainstreaming of this environmental, social and governance approach, or ESG, is great for investors who want their money to do good and do well, but it also creates an even more dizzying array of choices.
"You need to do the same due diligence you would be doing if you weren't interested in ESG," says Lisa Woll, chief executive of US SIF: The Forum for Sustainable and Responsible Investment, an advocacy and industry group. "Even if you've got an adviser, you've got to ask the questions."
After recognizing Earth Day on April 22, it's perhaps time to ask how green your portfolio is, or how green you want it to be. The country's overall investment portfolio is moving more that way.
Nearly $6.6 trillion was in sustainable and related strategies at the start of 2014, more than one in every $6 under professional management, according to the most recent data from US SIF. Signs point to the trend continuing.
The Labor Department issued guidelines late last year expected to encourage more 401(k) plans to offer sustainable investments as an option. Last month, mutual-fund researcher Morningstar unveiled a new sustainability rating for about 20,000 funds around the world.
It's new ground for many individual investors. Sustainable investing has long been dominated by big institutions, such as university endowments looking to avoid fossil-fuel investments or pension funds encouraging more diversity in corporate board rooms.
For many years, most of the small number of socially responsible mutual funds available for individual investors were relatively simple. They would exclude companies like gun manufacturers and tobacco companies, for example.
Now, more funds are aiming to reward the good and not just punish the bad. Instead of excluding oil companies, fund managers are searching for those at the forefront of producing clean energy. Or they're looking for companies with board policies that are most aligned with shareholders.
Critics used to assume that these kinds of investments had to have lower returns. But proponents argue the strategy could lead to better longer-term performance. A company focused on the environment is potentially less risky because it's less likely to face regulatory fines.
Sustainable stock mutual funds had better returns than the median traditional fund nearly two thirds of the time, going back to 2008, according to a report issued last year by the Morgan Stanley Institute for Sustainable Investing. It measured performance for more than 10,000 funds.
Here are some questions you may want to ask if you're interested in sustainable investing:
- What do I want my money to do?
Sustainable investing is a broad term, and it covers a gamut of interests. Some funds invest according to religious principles. The Global X S&P 500 Catholic Values ETF began trading just this past week, for example, and excludes companies in the index that make money from nuclear weapons or contraceptives.
Other funds aim to invest in companies that have bigger proportions of women in their boardrooms and management. Yet more funds are generalists that aim to deliver similar returns as a total-market stock fund, but with an eye toward environmental, social and governance issues.
Some funds do more outreach than others, engaging with CEOs and boards to push for better environmental, social and governance practices.
- How does the fund invest?
Don't assume a fund invests how you want just because it says it's "sustainable." You need to look at the fund's prospectus and other documents to see its investment objective, and how it tries to achieve it.
Someone who wants to own zero fossil-fuel companies, for example, should probably avoid the TIAA-CREF Social Choice Equity fund, one of the largest sustainable funds by assets. It tries to give returns similar to the total U.S. stock market. So it owns companies in every sector, including energy, but it looks to own only those that rate highest on its ESG measures.
"Investors need to understand there's no one-size-fits-all approach to any of these options," says Amy O'Brien, head of responsible investment at TIAA Global Asset Management. "You really need to do your homework on what criteria are being applied. There's a wide range."
- What kinds of investments am I considering?
Stock funds get most of the attention in sustainable investing, but more bond funds are entering the market.
They come with the selling point of helping to pay for specific projects, which some investors appreciate. The Columbia U.S. Social Bond fund, for example, bought bonds to help build a wind farm in Washington.
"There's a lot of investor focus on impact: Where is my money going?" says Chad Farrington, head of municipal research at Columbia Threadneedle Investments.
Again, investors need to dig into the documents to make sure they're comfortable with how the fund invests. The Columbia fund buys bonds related to charter schools, money that some investors would like to see stay within the established public school system, for example. The fund also buys public-school bonds.
- How much will this cost?
Remember that keeping costs low is among the best ways to help your investments grow. Investing in a sustainable mutual fund doesn't have to be an expensive endeavor, but make to sure check how big its expense ratio is.
Published: Mon, Apr 25, 2016
