A recent article in The Daily Beast featured a takedown of Jill Stein’s personal investments, in which she was accused of hypocrisy, and included the following statement: “Many critics say clean-energy and socially responsible investment funds offer a poor rate of return and should generally be avoided.”
Dr. Stein’s defense included the statement that she has “explored” more socially responsible funds but “found their investments in fracking and large-scale biofuels not much better than the non-green funds. I have not yet found the mutual funds that represent my goals of advancing the cause of people, planet, and peace.”
Jill Stein can easily be forgiven for believing what she was told about green, sustainable funds, because conventional front line investment professionals often say these things to their clients.
By her own admission, she has not had time to investigate the opportunities offered by the green, sustainable investing community: “Admittedly I have not spent a lot of time researching elusive ethical investments.”
This is unfortunate – there is nothing elusive about the sustainable investing industry. In a fact, it is a robust, $6 trillion juggernaut that is growing by leaps and bounds.
But this misunderstanding is indicative of the state of much of the informal discourse about personal investing – where zombie ideas, like “sustainable investing requires a performance sacrifice” and “sustainable funds aren’t much greener than their non-sustainable competitors” still lurch through investors’ cognitive landscapes, despite being thoroughly disproven in professional investing circles.
I am a Certified Financial Planner™ with a sustainable investing practice in the San Francisco area. CFP® practitioners are required to accept a fiduciary level of responsibility with investment clients, meaning that we must always put the client’s interest ahead of our own. About 5 years ago, one of my clients asked me to look into green investing.
While doing the research, I learned that funds incorporating sustainability analysis into their investment selection process generally delivered equal or better performance than their non-sustainable peers. This led to my publication of a book in 2013, titled: “Green Investing: More Than Being Socially Responsible.”
In 2015. Morgan Stanley’s Institute for Sustainable Investing published a report called “Sustainable Reality: Understanding the performance of Sustainable Investing Strategies.”
One page 1 of their report, they state that in 2014, 6.57 trillion, or $1 out of every $6 dollars of US assets is invested sustainably. In 2012, the ratio was 1$ of every $9 dollars.
They go on to say:
With this growth, investors increasingly ask what tradeoffs, if any, there are to sustainable investing. Some investors believe sustainable investments underperform, or have higher risk than their traditional counterparts. We set out to explore whether this view is accurate.
Here are the first two paragraphs of their Key Findings:
Investing in sustainability has usually met, and often exceeded, the performance of comparable traditional investments. This is both on an absolute and a risk-adjusted basis, across asset classes and over time, based on our review of US-based Mutual Funds and separately managed Accounts (SMAs).
Sustainable equity Mutual Funds had equal or higher median returns and equal or lower volatility than traditional funds for 64% of the periods examined.
So what exactly is “sustainable investing”? Today, definitions vary to some degree along a spectrum that includes socially responsible funds, impact funds and sustainable funds, but for the most part, the industry uses a security selection “lens” known as E-S-G. Before stocks and bonds are selected for a fund, the corporations issuing the stocks and bonds are scrutinized for their environmental and social impacts, and their quality of corporate governance.
Why don’t more investment professionals provide this information to their clients? It turns out that many financial professionals are employed by large, legacy Wall Street firms and national banks. These organizations frequently manage their own funds, and expect their employees to recommend these funds to their customers.
The retail investment industry is dominated by a few huge fund families such as Vanguard, American Funds and Fidelity. Their funds are ubiquitous in retirement plans, and are generally the first ones recommended by conventional financial professionals to prospective clients. These large, bloated legacy fund families are not known for innovation, and for the most part, they have not yet responded to the growing demand for sustainable investing options.
The good news is that in 2016, there are numerous innovative fund families offering hundreds of excellent sustainable, ESG screened funds to the public — funds with strong track records and excellent Morningstar ratings that are easily found once investors know that they exist. Some leading sustainable fund families are Calvert, PAX, Parnassus, Green Century, Domini. There are also a number of “green” exchange traded funds (ETFs), such as ETHO and DSI that have a very specific green mandate.
In addition, there are non-profit entities such as AsYouSow that have built valuable web-based tools for investors and investment professionals, enabling any of us to quickly and thoroughly scrutinize a fund’s exposure to industries that are harming the climate through excessive greenhouse gas emissions and rainforest deforestation.
One of the real problems with the old-school investing process is that, just like with Jill Stein’s portfolio, an adviser who is not informed about (or interested in) the benefits of sustainable investing will almost certainly recommend that a substantial “core holding” in everyone’s portfolio should be a fund that tracks the S&P 500 Index of large U.S. companies. The S&P is considered by many to be the most important benchmark for US stock investors, and is used as a reference point when assessing performance. Unfortunately, 12 to 15 percent of this Index represents fossil fuel related companies and big tobacco.
When I give seminars to investors I’ll often pick a fund, such as Parnassus’s Endeavor fund (PARWX), which is 100 percent fossil fuel free and holds mostly large U.S. stocks, and compare it to one of the gargantuan funds that tracks the S&P 500, such as Vanguard’s (VFINX). An easy way to do this is to go to Google Finance and enter the symbols for the funds. Over any time period you’d like to examine, the Parnassus fund has soundly beaten the S&P 500.
Yes, PARWX holds some Wells Fargo stock, but don’t let the perfect be the enemy of the good. Brown Advisory Sustainable Growth fund (BAWAX) is another good comparison – also completely fossil fuel free with equal or better performance compared to S&P tracking funds.
Here is a link to AsYouSow’s Fossil Fuel industry exposure search tool: https://fossilfreefunds.org.
Have some fun looking up VFINX, PARWX and BAWAX. This site can provide you with a long list of funds with no or very low exposure to the fossil fuel industry.
In summary, there is great news for people interested in sustainable, fossil fuel free investing: Once you know where to look, you will find a dynamic, innovative sustainable investment industry, offering high quality investment options and easy to use tools so that people like Jill Stein can better align their investment strategies with their personal values and ethics, without sacrificing performance.
In closing, I have a personal message for Dr. Stein: You need a new investment adviser!
Content posted to MyMPN open blogs is the opinion of the author alone, and should not be attributed to MintPress News.