Many of us are aware that how we spend our money impacts the world around us. In fact, our consumer choices are often referred to as “voting with our dollars.” Just as spending money shapes the world, so does how we invest money. Our IRAs, retirement accounts, and college savings funds have an impact.
Because many people invest their money in mutual funds or exchange-traded funds (ETFs), it can take a bit of detective work to figure out how the money is invested. For example, how do you know whether a fund invests in something that doesn’t align with your values, such as fossil fuel companies or pornography?
Before we share some tips on investing with your conscience, note that the past year has not been kind to environmental and social investment funds. Despite three of our seven picks outperforming their category, a lot of money flowed out of these mutual funds and ETFs into the “Magnificent Seven” stocks that dominated the stock market in 2023. However, over the past five years, the five assets that have been operating since 2018 have returned 9.95% annually. While that’s less than what you would have earned had you invested in the S&P 500, which says 12.89% a year, your investments would not be contributing to global warming or environmental damage while doubling in value in just 7 years and three months.
Climate-related investing is a long game, one that takes patience — with national governments poised to increase spending on their decarbonization efforts, ESG-related stocks, funds, and ETFs will likely see improvements over the next decade.
Socially Responsible Mutual & ETF Fund Considerations
Socially responsible mutual funds and ETFs have filters that allow investing funds in only certain companies or types of companies. For example, fund managers may exclude tobacco, firearms, gambling, alcohol, or pornography.
Today, one in four dollars under professional management in the U.S. is invested with socially responsible investment strategies, totaling more than $17.1 trillion. There are many different investment funds out there, so let’s examine some critical considerations.
Investment Funds That Fit Your Values
Socially responsible mutual fund managers commonly filter out companies due to workplace practices, company values, employee diversity, environmental concerns, community support, governance issues, religious values, and human rights practices. Some limit fossil fuel and nuclear power companies while others do not. Start by determining which factors are most vital to you when choosing a mutual fund.
It is a common misconception that socially responsible mutual funds and ETFs have lower investment returns. Some investors believe that taking social and environmental concerns into account reduces investment risk. Harmful ecological and social practices are liabilities that can create a huge financial burden for companies. However, funds that invest in only one or two sectors may have lower returns than the S&P 500 and could have a greater risk because they are not as diverse.
Fundholders are charged an annual percentage of assets for the fees and expenses associated with operating a fund. It is the cost of owning a fund, and the charges go towards its management — the lower the percentage, the lower the fees.
High fees can hinder returns and are an essential consideration before choosing a socially responsible mutual fund. Typically, the more actively managed the fund, the higher the expense ratio. This becomes even more important over time because the interest compounds.
Fund Diversity & Investment Goals
Thankfully, investing with a conscience doesn’t mean abandoning financial goals. Since socially responsible investing has been around for decades, there are many different funds to choose from with varying levels of risk, fund holdings, minimum purchases, and management practices.
Alternatives to Mutual Funds: Impact Investment Opportunities
Want to invest in making a difference? Impact investment opportunities allow investors to support positive projects and initiatives and are an alternative to purchasing mutual funds. Sample projects include preserving urban farmland, promoting renewable energy development, and expanding a local natural food coop.
In addition, Newday Impact has numerous portfolios that enable investors to support causes they believe in while still receiving competitive returns. Its portfolios address different areas of concern, such as clean water; climate action; wildlife conservation and animal welfare; ocean health; and diversity, equity, and inclusion. The climate action portfolio, for example, includes investments in industry leaders in reducing greenhouse gas emissions; selects investments based on ESG ratings; and includes Tesla and numerous companies helping the transition to renewable energy.
7 Great Low-Fee Socially Responsible Investment Funds
Earth911 picked the following funds, but these are just seven out of many socially responsible funds available. Please review any funds carefully before you invest, and make sure they align with your values and financial goals. Remember, regardless of the fund, there is an inherent risk in investing in mutual funds and ETFs.
Parnassus Endeavor Investor (PARWX)
Parnassus Investments was founded in 1984 before most people thought about socially responsible investing. Founder Jerome Dodson believed that there is a lower investment risk when eliminating companies involved in alcohol, gambling, and tobacco and instead, investing in companies that are mindful of the environment and employees. Also, this large company growth fund eliminates fossil fuel companies and seeks corporations with excellent working environments.
During 2023, Parnassus Endeavor Investor returned 5.82%, far less than the average for similar, albeit non-ESG funds, which delivered a 42.88% return.
Parnassus Mid-Cap (PARMX)
This Parnassus fund invests in mid-sized firms and focuses on fast-growing companies. Parnassus Mid-Cap is less strict than the Endeavor Investor and does allow fossil-fuel companies. The portfolio consists of fewer than 40 stocks and has a below-average turnover.
During 2023, the Parnassus Mid-Cap fund returned 4.58% compared to 50.44% for its peers.
This new exchange-traded fund was started in 2016 and consists of U.S. large-cap companies. The fund is a great way to invest in women-led businesses, as the fund seeks firms with greater gender diversity in senior management and on boards. After fees, the fund performance generally follows the SSGA Gender Diversity Index.
This year, the SPDR SSGA Gender Diversity Index ETF’s outpeformed other large-blend funds with 14.49% returns compared with 13.45% for the average fund focused on health care, financial services, consumer cyclicals and defensive companies, and large industrials.
The index fund has alcohol, tobacco, and pornography screens and also eliminates companies involved in nuclear energy or that have major sales to the military. The fund also looks for companies that demonstrate diversity in the workplace and it eliminates companies with human rights violations and major negative environmental impacts.
The FTSE Social Index Fund underperformed other large blend funds, which had 40.47% returns in 2023, with a nevertheless healthy 15.59% gain.
Invesco ESG NASDAQ 100 ETF (QQMG)
Invesco recently rolled out two socially responsible ETFs, QQMG and QQJG, which must meet Nasdaq’s ESG criteria. Thus, companies involved in alcohol, cannabis, controversial weapons, gambling, nuclear power, oil, gas, and tobacco are not eligible. The issuers must also meet the 10 United Nations Global Compact (UNGC) principles related to labor, corruption, human rights, and the environment and have a Sustainalytics score of less than 40 on a 100-point scale for unmanaged ESG risks.
QQMG is based on the Nasdaq 100 Index, which comprises the largest 100 non-financial companies listed on the Nasdaq. The fund is similar to the Invesco NASDAQ 100 ETF (QQQM), but with an environmental and social filter that removes a few stocks and weighs the companies slightly differently.
During 2023, the QQMG saw 38.40% returns compared to the average large-growth fund’s 12.42% gains.
ESG NASDAQ Next Gen 100 EFT (QQJG)
This ETF has stocks that meet the same criteria as QQMG and uses the Nasdaq Next Generation 100 Index, which comprises the largest non-financial firms outside the Nasdaq 100. It is similar to Invesco’s NASDAQ Next Gen 100 ETF (QQQJ), but the top holdings and weighing are a bit different. At its launch, 10 companies from the Nasdaq Next Generation 100 Index were excluded, including four casinos and three pharmaceutical companies. This fund is a good way to gain exposure to non-financial mid-cap companies.
The QQJG gained only 7.51% in 2023, falling just short of its peers’ 8.54% one-year returns.
Vanguard ESG U.S. Stock ETF (ESGV)
This fund filters out some companies in the alcohol, tobacco, pornography, weapons, fossil fuels, gambling, and nuclear power industries and tracks the performance of the FTSE US All Cap Choice Index. The fund contains small, medium, and large-cap stocks and is well diversified. ESGV excludes some companies that have violations of labor rights, human rights, anti-corruption, and environmental standards as defined by UN Global Compact principles, as well as some diversity requirements.
Vanguard ESG’s performance handily beat its peers’ 13.45% gains with 20.16% returns to date in 2023.
For a larger version of our printable comparison chart, click the image below.
Editor’s Note: This article is updated annually. Information contained is current as of December 6, 2023. This version includes contributions from Sarah Lozanova and Mitch Ratcliffe.