Green Investing Part 1 – the Basics of Mutual and Similar Funds: Know your ESGs…

Guest blogger: Hugh O’Connor, with Annette Olson

Money talks – twice. Take away money from investments that are damaging to the environment, and invest in the growing, green economy, and it results in the same dollar doing double the work. We need to use whatever resources we have, money included, even when in small amounts, for several reasons:

  1. It makes a direct impact both against and for specific industries.
  2. It helps fund the innovative minds of those who will help save this planet.
  3. Politicians have been shown to listen to industry more than voters (Whitehouse, 2017, Washington Post)
  4. You’ll generally earn nice dividends and capital gains yourself, which you can reinvest, making further impact.

Recognize what China and others are already recognizing. China has increased their investment in renewable energy by 60% in 2016 compared to 2015. For other examples…

Worldwide Clean Energy Investments Hit $333.5 Billion Last Year

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A nice summation of the power of individual investment is here:

“Most people think of the financial markets like the ocean—a vast, impersonal force of nature. But nearly one-third of that ocean is owned by individuals.” https://www.marketwatch.com/ad/article/narratives_nadex_74762?prx_t=bKgDAdJYgAJUQNA&&ntv_gscat=19

To help us to charge forward, I’ve invited Hugh O’Connor, a former colleague of mine who loves the whole puzzle and practice of investing on a personal basis, to pull together some ideas to consider when it comes to green investing, with me putting a word in here and there. Here’s the first of several articles he’ll be sending our way. After our Disclaimer:

Neither Hugh nor I are professionals or certified investment experts. Thus, we are NOT going to make recommendations for you on specialized types of funds, or companies, etc… We recommend you go to a professional financial advisor for that. Instead, this series is based on publicly available information and will explain some of the different types of green investing opportunities, and provide potential resources for more information. Certain investment types may not be suitable for all individuals.

Mutual Funds

In this first of the series, we are going to describe the context of “green investing,” with a focus on mutual funds and fund “families”—investment company offerings that include a variety of funds for different investment objectives and that cover different areas of the financial markets. Mutual funds are among the most popular forms of investment assets, largely because they simplify the investing process for their buyers. In the investing landscape, besides mutual funds, investors can directly purchase stocks (an ownership share in a company), buy individual bonds (the loan of money to an organization, with interest due to the investor), and otherwise purchase financial assets directly, usually through a licensed brokerage that ordinarily levies fees on both buying and selling these investments or “securities.” In the 1920s, however, the mutual fund was invented as a way of giving investors an ownership share of many different securities through a single purchase. Aside from simplicity, this provided investors with “diversification”—making their investment less vulnerable to losses that might result from investing their money in just one or a few companies and/or bonds. Any single security can possibly lose value or become worthless for unanticipated reasons such as management error, changes in market demand, malfeasance, or any number of other factors. Risk and uncertainty are fundamental to investing; but diversification is a good strategy for mitigating that risk for the long-term.

Thus, a mutual fund is a collection of assets—stocks, bonds and sometimes real estate, foreign currencies, derivatives such as options and warrants and other forms of financial securities—within the “wrapper” of a single tradeable fund, divided up into shares. Even though a fund remains a single legal entity, its actual contents can change occasionally or even frequently, as its managers sell some holdings and buy others, depending upon the fund’s style and strategy of investment. The price of a share of a particular mutual fund may change once a market day—at the close of business on that day. The fund share price reflects the current market value of all the financial securities it contains, depending upon daily market factors. There are tens of thousands of mutual funds worldwide, each usually restricted for sale to investors in their country of origin.[1]

Funds vary greatly according to their particular objectives and the types of securities they include. Some funds attempt to represent broad areas of the investing universe, such as “large capitalization” companies in the United States or globally (legally defined as “diversified”);[2] while others attempt to cover businesses in a particular market sector, such as telecommunications or health sciences and services (“non-diversified”). Still others cover only bonds, or mixtures of stocks and bonds, in varying proportions and types. The variety of fund asset combinations is endless. To make matters more complex, there are also different types of funds, such as “closed-end funds”, “unit trusts”, “exchange-traded funds” and others. To simplify this discussion, we will be concerned only with “open-end mutual funds”, which is the most accessible and most common form of fund investment.

Green funds, or ESGs

Funds that focus on socially-responsible, environmentally-sound or “sustainable” industries, companies, and investment securities could be either diversified or not, but would usually be considered “sector funds” of a sort. Most sector funds reflect a particular industry area (like energy stocks or real-estate investment trusts), but ESG (Environmental, Social and Governance) funds focus on businesses securities that meet ethical and operational standards set out in a fund’s “prospectus,” its legally-required, basic descriptive document that serves as a kind of charter. PaxWorld Funds describes the value of the ESG focus this way: “There is growing evidence that suggests that ESG factors, when integrated into investment analysis and portfolio construction, may offer investors potential long-term performance advantages. ESG has become shorthand for investment methodologies that embrace ESG or sustainability factors as a means of helping to identify companies with superior business models” (https://paxworld.com/sustainable-investing/what-is-esg/.)

The term “sustainable” is used as a criterion for applying environmental standards to the choice of investment securities, as illustrated in this quote from the Natixis Funds Web site:

“ESG factors can also be used to gauge the sustainability of specific businesses. For example, a solar panel manufacturer that produces great panels but has poor labor practices and pollutes surrounding bodies of water could be an unsustainable company in a sustainable industry.” (https://bit.ly/2IZXSI6).

The ESG approach to portfolio development dates from the 1960s, but within the last decade or two investor-interest has grown, resulting in funds numbering in the hundreds.

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In ESG We Trust — The Risk And Rewards Of ESG Investing (Forbes.com)

PaxWorld, Calvert and Natixis are investment companies with a strong focus on ESG. Other mutual fund companies, such as Alger, TIAA-CREF or Northern funds, among others, have a few socially-responsible funds to appeal to the socially-responsible investor audience. There are funds that focus on environmentally-related businesses, and others that focus on alternative/renewable energy; at least one invests in global, women-owned businesses; while another invests in water-related companies. And of course, there are others with variations on the ESG theme. Many, unfortunately, have names that do not clearly indicate their underlying philosophy. Online research will bring a wealth of information, but we recommend you talk to a financial advisor until you are more familiar with the arena. However, once you start, buying funds is actually pretty easy.[1] We’ll probably provide more info in an upcoming article about how to do that.

One question that all of us as investors will have is whether or not the performance of socially-responsible funds measures up against the performance of funds without that social consideration. We want to make sure that our money is being used wisely, after all. Again, this is an area where, unless you are already experienced at tracking this yourself, it is good to talk to your financial advisor, or seek free financial advice (which often is provided in publications at libraries and community centers). Who knows, maybe later we’ll have an article on how to find green financial advisors.

Examples

We will be creating a page with these, filling in the blanks under particular subjects. Here are a couple of different areas one can look into regarding ESG mutual and other similar funds to get started:

Renewable Energy:

1. Renewable Energy Will Be Consistently Cheaper Than Fossil Fuels By 2020, Report Claims (Forbes.com)

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Energy Conservation and Storage Technology

Waste Management/Pollution Abatement and Clean-up Technology

Environmental Support Services

Sustainable Food and Agriculture

Water Saving Technology:

Water Infrastructure

Other Examples, Resources

1. The Top 200 Sustainable Mutual Funds

Watch for future articles from Hugh and I, where we discuss other aspects of green investing.

Footnotes:


[1] The mutual fund industry in the United States is governed by the Securities & Exchange Commission, which enforces the rules under which mutual funds describe themselves to potential investors.

[2] U.S. Securities & Exchange Commission

[3] Many mutual fund companies permit investors to buy shares of their funds directly, through the mail; or online, by transferring money from a pre-established account; or through some other form of electronic funds transfer. Other fund companies require that you buy their funds through a financial representative, who usually receives a commission for this in the form of a “load” that is deducted from your initial and subsequent investment amounts. Unless someone is really at sea and has no idea what they are doing, it is better to avoid “load funds” altogether and focus on “no load” companies. The reason for this is that, when you pay a load/commission, you are not just paying that dollar amount, but rather all the future returns, dividends, capital gains, etc. that the commission amount would generate if it remained part of your investment.

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