How To Invest in Sustainable Mutual Funds
Does your portfolio have mutual funds that own oil, gas, coal, or gun stocks? If you invest in conventional mutual funds, the answer is going to be “yes.” So what are your options?
SustainFi April 14, 2021
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By switching to environmental, social, and governance (ESG) funds, you can seek returns and make an impact at the same time.
What are ESG mutual funds?
ESG mutual funds consider environmental, social, and governance (ESG) metrics when picking investments. Their strategies vary. Some exclude controversial stocks like fossil fuel or tobacco companies; others invest in clean technologies or businesses with diverse management teams.
ESG investing allows you to get better results while aligning your investments with your values. There is a lot of evidence showing that strong ESG metrics improve performance while reducing risk. Many ESG fund managers also engage with management teams to set and achieve goals such as reducing carbon emissions.
Interested in learning more about ESG investing fundamentals? Read more here.
What’s the difference between ETFs and mutual funds?
There are two major types of funds, exchange-traded funds (ETFs) and mutual funds. Both put money in baskets of stocks, saving you the trouble of picking individual companies. Both types of funds are diversified. If one stock in the basket doesn’t do well, the impact on the basket should be minimal.
The main difference between ETFs and mutual funds is how they are traded and how they pay taxes.
- ETFs trade on exchanges like shares of stock. Their value changes throughout the day, and you can buy or sell ETFs when the market is open. You can also look up what stocks the fund owns in real time
- Mutual funds only price and are bought or sold at the end of the trading day. The price of the mutual fund is the value of the shares it owns. Fund holdings are disclosed periodically (for example, monthly or quarterly)
- ETFs are more tax-efficient because of the way they are structured. An ETF doesn’t have to buy or sell shares of underlying stocks every time an investor sells ETF shares
- Mutual funds are less tax-efficient. Every time an investor sells a mutual fund, the fund manager must sell underlying stocks or bonds. These sales are taxable events for all investors in the mutual fund, leading to higher costs
- There is no minimum investment to buy ETFs
- Mutual funds often require a minimum investment, usually between $500 and $5,000
Fees and expenses
- Most ETFs cost less than mutual funds. In 2019, the average mutual fund cost 0.52% ($52 each year on a $10,000 investment) vs. only 0.18% for the average ETF. You can find many mutual funds that cost over 1%. Some mutual funds also charge commissions known as “loads”
- Most ETFs are “passive,” meaning that they track a stock market index such as the S&P500. Passive investing reduces fund expenses
- Most mutual funds are “active,” that is, run by a professional portfolio manager with a team of analysts who need to be paid
Should you buy ETFs or mutual funds?
ETFs are generally cheaper, easier to trade, more transparent, and tax-efficient than mutual funds. The investing world is shifting to ETFs, and some mutual funds are even rebranding as ETFs. But mutual funds are not dead yet, and here’s why:
1. Mutual fund managers can work with companies on ESG issues
ETFs track an index, and ETF sponsors like Vanguard do not actively engage with companies to change their behavior. Most assets they manage are not sustainable, and ETF sponsors have been criticized for voting against shareholder resolutions targeting climate change goals. According to ShareAction, in 2020, BlackRock and Vanguard, the world’s largest asset managers, backed only 12% and 14% of ESG-friendly resolutions, respectively.
If you are looking for a fund to work with company management on ESG issues, you should look for an actively managed ESG mutual fund. Activist ESG managers like Green Century reach out to companies and file shareholder resolutions. Some publish impact reports to show investors how their money is making a difference. For example, Green Century is currently pressuring meatpacker Tyson and agricultural giant Bunge on their contribution to deforestation.
2. Some mutual funds are cheaper than ETFs
Passive or index mutual funds track an index like most ETFs. This keeps their costs low. A popular ESG index fund, Vanguard FTSE Social Index Fund (VFTAX), costs only 0.14%. An ESG ETF that also invests in U.S. equities – Columbia Sustainable U.S. Equity Income ETF (ESGS) – costs 0.35%, more than double.
3. Most 401k plans only offer mutual funds
Until ETFs were created in the nineties, mutual funds were the only way for small investors to buy into the market without buying many individual stocks. Even today, there are still more mutual funds – particularly ESG funds – than ETFs. Most 401(k) retirement plans only offer mutual funds. If you are lucky to have an ESG fund in your 401(k), it is likely a mutual fund.
If you want to learn more about saving for retirement with an ESG angle, read more here.
How to pick an ESG mutual fund
1. Where do you find ESG funds?
2. What type of fund should you buy?
Financial experts recommend putting your money in both stocks (equities) and bonds. This reduces risk if one type of asset, such as equities, does badly. Equities have historically been less volatile than bonds. Owning bonds should reduce the amount you can lose in total if stocks sell off. However, equity returns have been much higher than bond returns, so you need to own equities to grow your money.
Popular portfolios include the 60/40 portfolio (60% stocks, 40% bonds) and the three-fund portfolio (40% U.S. stocks, 20% international stocks, 40% bonds). The three-fund portfolio is one degree more diversified because it includes international equities.
You can create a simple portfolio through balanced funds. Balanced funds invest in bonds and equities, usually sticking to a 50-70% equity allocation. For example, Calvert Balanced Fund (CBAIX) sticks to a roughly 60%/40% stock-to-bond ratio.
Another option is target-date mutual funds, also known as life-cycle funds. These funds hold stocks and bonds and rebalance their mix based on when you expect to retire. The closer you are to retirement, the more bonds you should own. 401(k) plans frequently default to a target-date fund.
If choosing funds sounds too time-consuming, you can always turn to robo-advisors. They will do the work for you for a small fee. Learn more about sustainable robo-advisors.
3. Should you buy passive or actively managed funds?
Actively managed funds: most mutual funds employ a portfolio manager to pick stocks or bonds for the fund. These funds are called actively managed. The goal of the fund manager is to beat the market, though very few have done so consistently. Many studies have shown that most actively managed funds do worse than the market after expenses and fees are factored in. Constant buying and selling can also raise taxes and trading fees. At the same time, actively managed funds charge high fees, sometimes over 1% ($100 on a $10,000 investment each year.)
Passive or index funds: index funds track an index (a group of stocks that approximate how the market or a subsector of the market is doing.) The S&P500 is probably the best-known index. A fund company like Vanguard buys all the stocks in the index and sells them to investors as a fund. Because there is no manager picking stocks, fees are much lower. The average fee for a managed stock mutual fund is 0.89% vs. 0.12% for an index fund.
Choosing between active and passive funds: index funds are cheaper, but index fund managers like Vanguard don’t engage with management teams to improve ESG performance. Activist fund managers like Green Century do. When choosing stocks, actively managed ESG funds also add proprietary research to ESG ratings from big data providers.
4. Does the fund’s strategy align with your investing goals?
First, decide what your ESG investing goals are. Do you want to own stocks with better ESG scores than the market average? Do you want to divest from oil and gas stocks or invest in clean technology? Are you primarily interested in diversity or governance? Once you’ve decided, you can see what funds align with your goals and values.
The fund’s prospectus – found on the manager’s website – should give you an idea of the strategy. The Parnassus Endeavor Fund (PARWX) “invests in U.S. large-cap companies that have sustainable competitive advantages, increasing relevancy, quality management teams, and positive ESG attributes.” “The Fund seeks companies with positive workplaces and avoids investments in fossil fuels.”
You should also look up the fund’s top holdings. Do these investments align with your goals? For example, PARWX’s top holdings are Micron, Applied Materials, and Charles Schwab. The fund has a strong ESG score from Sustainalytics and an A rating from FossilFreeFunds.org. Sounds good, yet PARWX is not the best fit if you want to make an impact through clean energy investing.
5. Does the fund’s past performance matter?
You must’ve heard that “past performance does not guarantee future performance.” That’s true. We don’t recommend chasing past performance, but a track record of underperformance versus the benchmark should concern you. Ideally, an actively managed fund should have five years of track record available.
Picking the top-performing mutual fund from the prior year is not a good idea either. Funds can beat the market by a lot when they own few risky stocks. If the tide turns, the top-performing funds from one year could end up at the bottom the following year.
6. What are the fund’s expenses and fees?
Fees (expense ratios): mutual fund fees often exceed 1%. Some expense ratios include “level-load fees” or “12b-1 fees” to pay the fund’s marketing costs (why should you be paying for the fund’s marketing?). You should look for an expense ratio of under 1% for an actively managed fund. If you want to cut costs above all, we suggest index funds or ETFs.
Sales Charges: some brokers charge extra fees when they sell you the fund. These fees are known as “loads,” including “front-end loads” (when you buy the fund) or “back-end loads” (when you sell.) Loads can add up to 4-8% of your investment. The fees don’t even go to the fund but to the broker. You should never pay loads.
7. Does the fund engage with companies on ESG issues?
Mutual fund mainstays like Fidelity, Vanguard, or Putnam offer ESG mutual funds, yet most assets they manage are conventional. As a result, these managers are not ESG champions (though some offer attractive ESG funds.) Engagement and shareholder voting policies are usually determined at the fund manager level, not at the individual fund level.
If you are looking for a fund manager to work with companies on ESG issues, we suggest ESG-only funds. These funds include Parnassus, Calvert, Pax World, Boston Common, and Green Century. These funds are more expensive than index funds or ETFs, frequently costing around 1%, so there is a trade-off between engagement and cost.
Here is an overview of ESG-only mutual fund managers:
Founded in 1984 in San Francisco, Parnassus is the largest pure-play ESG fund manager with $39 billion in assets. Its Core Equity Fund (PRBLX) is the largest ESG mutual fund with over $26 billion in assets. That fund has beaten the S&P500 since its launch in 1992. The firm is independent and employee-owned.
Jerome Dodson started Parnassus with $300,000 from family and friends with the premise that excluding stocks in sectors like tobacco and alcohol would beat the market. Today Parnassus offers five ESG funds, including four equity funds and a bond fund. All Parnassus funds exclude fossil fuel companies. In addition to analyzing ESG criteria, Parnassus investment professionals work with companies and vote on shareholder resolutions.
Most Parnassus funds cost around 1%.
Established in 1976, Calvert is an ESG specialist with over $31 billion in assets. Calvert offers multiple active and passive equity funds, bond funds, and balanced funds. The largest fund, Calvert Equity Fund (CSIEX), has over $5 billion in assets. The team does its own ESG research in addition to using ESG sources like MSCI. Several people on the team work with companies to improve their ESG disclosure.
Calvert’s actively managed funds are expensive, but they also offer several cheaper index funds. The flagship Calvert Equity Fund (CSIEX) costs 0.94%, but Calvert US Large Cap Core Responsible Index Fund (CSXAX) is 0.49%.
Calvert is now owned by investment bank Morgan Stanley (which doesn’t have a sustainability agenda.)
Pax World Funds (Impax Asset Management)
Pax World Funds, owned by a European ESG specialist Impax Asset Management, launched the first socially responsible mutual fund in the U.S. in 1971. Pax World offers a comprehensive ESG lineup, including large and small-cap equity funds, international funds, bond funds, and a gender diversity fund.
In 2019 Pax engaged with 154 companies focusing on board and executive diversity, pay equity, and climate change. They publish an annual engagement report.
Most PAX World funds cost around 1%.
Founded in 2003 by Geeta Aiyer, Boston Common is a dedicated ESG fund offering U.S. equity and international equity mutual funds. Ms. Aiyer was raised in India, and most of the fund’s investment professionals, who are also the fund’s owners, are women or people of color.
The fund is an active owner, engaging with management teams and filing shareholder proposals. In 2020 Boston Common engaged with management teams 219 times and filed shareholder resolutions on issues like greenhouse gas emissions at Danaher.
Boston Common funds are pricey with a 1% expense ratio, but you are paying more for shareholder engagement.
Green Century is a Boston-based ESG specialist offering three small funds: a U.S. equity fund, an international equity index fund, and a balanced fund. None of the funds invest in fossil fuels.
Green Century prioritizes shareholder engagement. For example, they’ve pushed Amazon to reduce food waste in its grocery business and got Kellogg to source 100% deforestation-free palm oil.
Green Century is the only mutual fund company in the U.S. that is 100% owned by environmental and public health nonprofit organizations. All profits go to support their work. However, Green Century funds are among the most expensive in ESG land, costing between 1.25% and 1.47%.
Domini is a women-led ESG-only mutual fund manager. Domini offers five funds, including one bond fund. The fund manager avoids oil and gas producers and coal miners (but not utilities that may rely on fossil fuels). All funds also exclude weapons, guns, for-profit prisons, tobacco, alcohol, and gambling.
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Top U.S. equity ESG funds
If you are just starting out with ESG mutual funds, U.S. equity funds are the best starting point.
Here are the most popular ESG funds you can buy today:
|Fund||Ticker (Investor Shares)||Expense Ratio||Assets ($bn)||2020 Performance||Inception Date||Fossil Free Funds Rating||MSCI Rating||Sustainalytics Rating|
|Parnassus Core Equity Fund||PRBLX||0.86%||26.7||21%||1992||A||A||5 / 5|
|Vanguard FTSE Social Index Fund||VFTAX (Admiral Shares)||0.14%||12.0||23%||2003||B||BBB||4 / 5|
|Parnassus Mid-Cap Fund||PARMX||0.99%||7.8||15%||2005||C||A||5 / 5|
|TIAA-CREF Social Choice Equity Fund||TICRX||0.46%||6.9||20%||1999||C||A||4 / 5|
|Putnam Sustainable Leaders Fund||PNOPX (Class A)||1.03%||6.1||29%||1990||C||A||4 / 5|
|Calvert Equity Fund||CSIEX (Class A)||0.94%||5.4||24%||1987||A||A||5 / 5|
|Brown Advisory Sustainable Growth Fund||BIAWX||0.86%||5.2||39%||2012||A||A||4 / 5|
Data as of 3/31/2021
Parnassus Core Equity Fund (PRBLX)
- Expense ratio: 0.86%
Launched in 1992 by ESG specialist Parnassus, PRBLX is the largest ESG fund, with nearly $27 billion in assets. PRBLX is actively managed and invests in a small number of large-cap U.S. stocks, seeking high-quality companies with pricing power. Many controversial sectors, such as tobacco, weapons, and fossil fuels, are excluded.
The fund owns 38 stocks, a lot of them large-cap tech names like Microsoft and Amazon. The top three are Microsoft, Applied Materials, and Deere. PRBLX has top ratings from Fossil Free Funds (A) and Sustainalytics (5/5).
Although the fund charges a high 0.87% fee, PRBLX has beaten the S&P since its inception in 1992 and more recently. The fund manager, Todd Ahlsten, has been at Parnassus for over 25 years. He likes entrenched businesses with moats and recurring revenues, such as Microsoft, the fund’s top holding. As an ESG investor, Ahlsten also looks for good corporate citizens.
Vanguard FTSE Social Index Fund (VFTAX)
- Expense ratio: 0.14%
VFTAX is a Vanguard index fund that tracks the FTSE4Good U.S. Select Index. Established in 2003, this is one of the more diversified ESG mutual funds with over 400 investments. The stocks are screened for social and environmental criteria. Certain industries like tobacco and fossil fuels are excluded.
Like other ESG index funds and ETFs, VFTAX owns a lot of large-cap tech stocks. The top five holdings are Apple, Microsoft, Amazon, Facebook, and Google. Although the fund doesn’t own oil, gas, or coal companies, VFTAX has a B rating from Fossil Free Funds. VFTAX owns several electric utility companies that may rely on fossil fuels (which we don’t see as problematic). The fund has a high ESG score from Sustainalytics.
VFTAX charges 0.14% annually for Admiral Shares, which require a $3,000 minimum investment. The cost is similar to some of the cheapest ETFs.
Parnassus Mid-Cap Fund (PARMX)
- Expense ratio: 0.99%
Launched in 2005 by Parnassus, PARMX is an actively managed fund that invests in mid-cap companies with long-term competitive advantages and positive performance on ESG criteria. PARMX owns 44 stocks, a lot of them in tech. Its top three holdings are speech recognition software company Nuance Communications, waste disposal business Republic Services, and GPS solutions provider Trimble Inc. Although Parnassus doesn’t officially invest in fossil fuels, Fossil Free Funds gave PARMX a C rating because it owns two electric utilities, Idacorp and Portland General Electric. In contrast, Sustainalytics gave PARMX a top score.
The fund charges a 0.99% fee. Performance has been a touch lower than its benchmark, the Russell Mid-Cap Index, since its inception. In 2020 PARMX returned 14.9% vs. 17.1% for the benchmark.
PARMX is managed by Matthew Gershuny and Lori Keith, who started at Parnassus as an intern in 1991.
TIAA-CREF Social Choice Equity Fund (TICRX)
- Expense ratio: 0.46%
Established in 1999, Nuveen’s TICRX tries to replicate the return of the U.S. stock market while including ESG criteria. Although TICRX doesn’t officially track an index, the fund managers want to mirror the risk-return profile of the Russell 3000 index.
TICRX is one of the most diversified funds on this list, with over 600 holdings. The top three investments are Apple, Microsoft, and Tesla. The fund owns fossil fuel companies, including several oil majors like Chevron. TICRX has a C rating from Fossil Free Funds. The Sustainalytics rating is better (four out of five globes).
TICRX has $6.7 billion in assets and charges a relatively low (for an actively managed mutual fund) 0.46% fee. Despite being one of the more popular ESG mutual funds, TICRX has underperformed its Russell 3000 benchmark over the past 10 years.
Putnam Sustainable Leaders Fund (PNOPX)
- Expense ratio: 1.03%
Established in 1990 as a conventional (non-ESG) fund, PNOPX converted to an ESG strategy in March 2018, when two portfolio managers with ESG experience, Katherine Collins and Stephanie Dobson, took over. Katherine Collins is an industry veteran who ran funds at Fidelity and set up an ESG-focused research firm.
PNOPX invests in large-cap U.S. leaders in material sustainability issues. The investment team doesn’t exclude any sectors, looking at company fundamentals instead. The fund has 67 holdings, including the usual ESG top three (Microsoft, Apple, and Amazon). PNOPX has a C rating from Fossil Free Funds due to some utilities holdings and a four-globe rating from Sustainalytics.
PNOPX charges a high (1.04%) management fee, but the fund has done much better than its benchmarks under the new management team.
Calvert Equity Fund (CSIEX)
- Expense ratio: 0.94%
Established by Calvert in 1987, CSIEX has been run by portfolio manager Joseph Hudepohl (through a sub-advisor, Atlanta Capital) since 2015. The fund invests in large-cap U.S. stocks, emphasizing profitable industry leaders. The management team doesn’t exclude any sectors, but they screen all investments for ESG criteria and avoid companies with sky-high valuations.
The fund is concentrated with only 47 holdings, of which the top three are Thermo Fisher, Google, and Danaher. CSIEX has no fossil fuel exposure, an A rating from Fossil Free Funds, and five globes from Sustainalytics.
The 0.94% expense ratio is high, and the fund has underperformed the Russell 1000 index, partially due to avoiding high-flying tech stocks. But the fund has also been less volatile than the index.
Brown Advisory Sustainable Growth (BIAWX)
- Expense ratio: 0.86%
BIAWX is a large-cap fund that invests in companies with sustainable practices and good growth prospects.
Out of its 33 holdings, the top three are Microsoft, Amazon, and Visa. Although the fund managers don’t have any hard rules about fossil fuels, BIAWX has no fossil fuel exposure and an A rating from Fossil Free Funds. The fund owns more healthcare stocks (such as insurer United Health) than the benchmark (24% vs. 13%), and it owns fewer big tech names than other ESG funds.
Although the fund costs 0.86%, BIAWX has meaningfully outperformed the benchmark index, Russell 1000. BIAWX is managed by ESG veteran Karina Funk and David Powell. The two have worked together for more than a decade. Brown Advisory is based in Baltimore and runs mostly conventional funds.
💰 Our pick
Parnassus Core Equity Fund (PRBLX) is a solid ESG fund. It avoids fossil fuels, has a long record of strong performance (offsetting its high fee), and a dedicated, ESG-focused fund manager.
Top foreign equity ESG funds
Personal finance experts recommend investing 15-25% of your portfolio in international equities. For example, you could allocate 10-20% to developed markets like Europe or Japan and 5-10% to emerging markets (such as China, India, and Russia). These are the largest ESG funds that invest in foreign equities:
|Fund||Ticker (Investor Shares)||Expense Ratio||Assets ($m)||2020 Performance||Inception Date||Fossil Free Funds Rating||MSCI Rating||Sustainalytics Rating|
|Calvert Emerging Markets Equity Fund||CVMAX (Class A)||1.24%||4,500||24.5%||2012||A||A||4 / 5|
|Domini Impact International Equity Fund||DOMIX||1.38%||1,400||5.7%||2006||B||A||4 / 5|
|Calvert International Equity Fund||CWVGX (Class A)||1.14%||818||17.7%||1992||B||AA||4 / 5|
|TIAA-CREF Social Choice International Equity Fund||TSORX||0.71%||762||9.5%||2015||D||AA||4 / 5|
|Pax MSCI EAFE ESG Leaders Index||PXINX||0.74%||746||10.5%||2014||B||AA||4 / 5|
Data as of 3/31/2021
Calvert Emerging Markets Equity Fund (CVMAX)
- Expense ratio: 1.24%
Started by ESG fund manager Calvert in 2012, CVMAX is the largest emerging market ESG fund with $4.5 billion in assets. The portfolio managers use Calvert’s ESG criteria when picking stocks.
CVMAX is a concentrated fund with only 57 investments, largely in China, South Korea, Taiwan, and India. Top holdings are Taiwanese semiconductor maker TSMC, Alibaba, and Tencent. The fund has no fossil fuel investments and an A Rating from Fossil Free Funds.
Despite its high fee (1.24%), CVMAX has done extremely well, beating the MSCI Emerging Markets Index by 3.6% since its inception. In recent years performance was even better. However, the fund’s lead portfolio manager, Gary Greenberg, left the fund in late 2020. He has been replaced by Kunjal Gala, who has helped him run the fund since 2019.
Given its strong performance, CVMAX is closing to new investors in May 2021.
Domini Impact International Equity Fund (DOMIX)
- Expense ratio: 1.38%
Launched in 2006, DOMIX is a popular fund that invests in international equities, primarily in Europe and Japan. Domini Impact Investments is an ESG-only fund manager.
DOMIX has 186 holdings, and the top 10 are about a fifth of the fund. Domini avoids oil and gas producers and coal miners but not utilities that may rely on fossil fuels. This led to a B rating from Fossil Free Funds. All Domini funds exclude weapons, guns, for-profit prisons, tobacco, alcohol, and gambling.
Domini has robust ESG screens, and management works with companies on ESG issues. But the fund is very expensive (1.38%) and has underperformed its benchmark, an index of developed markets equities.
Calvert International Equity Fund (CWVGX)
- Expense ratio: 1.14%
Calvert’s International Equity Fund invests in large-cap equities, mostly in Europe and Japan. The fund manager, Calvert, is an ESG specialist.
The fund owns 47 stocks; the top three are Nestle, Sanofi, and Unilever. The management team likes healthcare and industrials. The fund doesn’t own tobacco or fossil fuel reserve-owning companies. They have a good score from Fossil Free Funds and four globes from Sustainalytics.
CWVGX has been managed by the current team, Christopher Dyer and Ian Kirwan, since 2016. They beat their benchmark, a developed market index MSCI EAFE, by over 2% during that timeframe.
TIAA-CREF Social Choice International Equity Fund (TSORX)
- Expense ratio: 0.71%
Nuveen’s TIAA-CREF Social Choice International Equity Fund (TSORX) is less expensive than other actively managed funds in this category. Over the past five years, performance has been in line with the benchmark, MSCI EAFE Index. However, somehow 6.8% of the fund’s assets are invested in fossil fuels, including in multiple oil and gas companies. As a result, this popular fund has a D rating from Fossil Free Funds.
We recommend avoiding this fund despite the “social choice” in its name and an ESG mandate.
Pax MSCI EAFE ESG Leaders Index (PXINX)
- Expense ratio: 0.74%
A fund from ESG boutique Pax World, PXINX is an index fund that tracks the performance of the MSCI EAFE ESG Leaders Index. The index consists of stocks with good ESG ratings in developed markets ex-U.S. PXINX has good ratings from Fossil Free Funds and Sustainalytics.
While cheaper than actively managed mutual funds, PXINX costs more than a comparable ETF. An ETF that tracks the same index – Xtrackers MSCI EAFE ESG Leaders (EASG) – costs only 0.18%. Pax World’s commitment to ESG and engagement with management teams are valuable. But we are not sure that paying 0.56% more ($56 annually for a $10,000 investment) is justified.
💰 Our pick
We prefer the two Calvert funds, Calvert Emerging Markets Equity Fund (CVMAX) and Calvert International Equity Fund (CWVGX), for emerging and developed markets stocks. Despite higher-than-average fees, both funds have done very well. Calvert has been committed to sustainability and engagement goals.
Top bond ESG funds
Several ESG mutual funds invest in bonds (debt of businesses or governments). These funds do not provide as much growth as stock funds, but they are more stable during market ups and downs.
We highlight the largest ESG bond funds:
|Fund||Ticker (Investor Shares)||Expense Ratio||Assets ($bn)||2020 Performance||Inception Date||Yield (30-day SEC Yield)||Fossil free?||Credit Quality|
|TIAA-CREF Core Impact Bond Fund||TSBRX||0.64%||6.3||7.2%||2012||1.4%||No||A|
|CCM Community Impact Bond Fund||CRATX||0.81%||3.0||4.1%||2007||1.1%||Yes||AAA|
|Calvert Bond Fund||CSIBX (Class A)||0.73%||2.2||7.4%||1987||1.5%||No||A|
|PIMCO Total Return ESG Fund||PTGAX||0.90%||2.1||8.5%||2017||1.2%||No||AA|
|Calvert Green Bond Fund||CGAFX||0.73%||0.9||7.0%||2013||1.0%||No||A|
Data as of 3/31/2021
TIAA-CREF Core Impact Bond Fund (TSBRX)
- Expense ratio: 0.64%
With over $6 billion in assets, TSBRX is the largest bond mutual fund with an ESG framework. TSBRX buys investment-grade bonds of companies that show ESG leadership or have measurable environmental or social impact.
Most of the roughly 1,000 holdings are in U.S. bonds, but the fund also owns international bonds (around 20% of assets) and green bonds (bonds used to fund green projects). The portfolio has several fossil fuel investments, such as natural gas distributor National Fuel Gas (0.2% of assets). The fund’s performance has been in line with the non-ESG aggregate bond market index (Bloomberg Barclays U.S. Aggregate Bond Index).
CCM Community Impact Bond Fund (CRATX)
- Expense ratio: 0.81%
The Community Impact Bond Fund (CRATX) was launched in 2007 to invest in several impact themes like affordable housing, environmental sustainability, and minority advancement.
The portfolio includes over 1,600 fossil fuel free investments, largely in investment-grade bonds. The quality of the fund’s investments is very high (AAA). CCM provides impact reports describing the benefits that its investments created. Investors with over $500,000 in the fund can direct their money to a specific theme or geography.
In 2020, Community Capital launched its Minority Cares initiative. New individual investments will benefit minority businesses and communities, education, and affordable housing.
The fund’s fees have been high at 0.81%, and returns have averaged 3.2% since inception and 2.6% over the past ten years. However, CRATX is one of the best impact bond funds in the market.
Calvert Bond Fund (CSIBX)
- Expense ratio: 0.73%
Created by ESG boutique Calvert in 1987, CSIBX invests in U.S. corporate bonds, asset-backed securities, and green bonds. Impact investments, including green bonds, represent over a third of the fund’s assets. The fund managers use over 300 ESG indicators.
CSIBX has nearly 400 holdings; very few are in energy relative to traditional funds. The fund does have small oil and gas investments, such as pipeline operator NuStar Energy (0.08% of assets).
The 0.73% fee is slightly lower than the mutual fund average of around 1%, and performance has been in line with the benchmark, the Bloomberg Barclays U.S. Aggregate Bond Index.
PIMCO Total Return ESG Fund (PTGAX)
- Expense ratio: 0.90%
Pimco launched its ESG strategy in 2017 by rebranding an older fund into an ESG fund. The vast majority of Pimco’s assets continue to be conventional.
Pimco’s Total Return ESG Fund (PTGAX) is the ESG version of Pimco’s flagship Total Return Fund. It adds Pimco’s ESG scoring methodology and excludes issuers involved in controversial weapons, tobacco, and coal. The fund avoids companies with deteriorating ESG practices, such as poor environmental policies. PTGAX doesn’t own oil and gas companies, though the portfolio includes multiple utilities.
The fund charges a high fee (0.90%) to individual investors, which has made it hard to beat the benchmark after fees.
Calvert Green Bond Fund (CGAFX)
- Expense ratio: 0.73%
Green bonds support climate and environmental projects like building renewable energy facilities. For example, in 2019, Apple issued a $2.2 billion green bond to fund carbon emission reduction initiatives like solar rooftops in Japan.
Established in 2013 and managing over $900 million, Calvert’s Green Bond Fund (CGAFX) is the largest fund that invests in green bonds. Its top holdings include green bonds issued by the government of France and by Apple. Three-quarters of the assets are in the U.S., but CGAFX also invests internationally, including in France, Canada, and the Netherlands.
The fund charges a 0.73% fee, which is at the low end of actively managed mutual funds.
💰 Our pick
TIAA-CREF Core Impact Bond Fund (TSBRX) or the Calvert Bond Fund (CSIBX) could be the bond core of your mutual fund ESG portfolio. CCM Community Impact Bond Fund (CRATX) or Calvert Green Bond Fund (CGAFX) are solid choices for impact investing. The funds respectively target community development and the environment.
Impact investing benefits social or environmental causes. We highlight three mutual funds that invest in women’s leadership, water, and green energy.
|Fund||Ticker (Investor Shares)||Theme||Expense Ratio||Assets ($m)||2020 Performance||Inception Date||Fossil Free Funds Rating||MSCI Rating||Sustainalytics Rating|
|Pax Ellevate Global Women's Leadership Fund||PXWEX||Women’s leadership||0.80%||822||13.7%||1993||C||A||4 / 5|
|Calvert Global Water Fund||CFWAX||Water||1.24%||517||14.8%||2008||B||AA||4 / 5|
|Fidelity Select Environment and Alternative Energy Portfolio||FSLEX||Green energy||0.85%||412||21.2%||1989||C||AA||3 / 5|
Data as of 3/31/2021
Pax Ellevate Global Women’s Leadership Fund (PXWEX)
- Expense ratio: 0.80%
Research shows that companies with more women leaders have higher returns on capital, greater innovation, increased productivity, and higher employee retention and satisfaction.
Launched in 1993 by ESG boutique Pax World, Pax Ellevate Global Women’s Leadership Fund (PXWEX) invests in companies that advance women through gender-diverse boards and senior leadership teams. Pax World also screens out oil and gas, weapon, and tobacco companies.
The fund has more than 400 global stocks, including Microsoft, Amazon, investment management firm Principal Financial Group, and cosmetics company Estee Lauder. Although Pax World seeks a fossil free strategy for this fund, PXWEX has a C rating from Fossil Free Funds. This is because they own several electric utilities, which we don’t view as problematic. The rating from Sustainalytics is good.
Calvert Global Water Fund (CFWAX)
- Expense ratio: 1.24%
Global water supplies are at risk from climate change, pollution, and scarcity. ESG-minded investors are looking for companies that can solve key water issues.
The Calvert Global Water Fund (CFWAX) invests in U.S. and foreign companies whose main business is in the water industry. These businesses include water utilities and water infrastructure and technology companies. About half of the fund’s 118 holdings are from the U.S. Top stocks include Ecolab, Xylem, and Pentair. The fund has a B rating from Fossil Free Funds and four globes from Sustainalytics.
Although the Calvert Global Water Fund has done well, it charges very high fees (1.24%), even for a mutual fund. Invesco Water Resources ETF (PHO) costs only 0.60%. If you pick Calvert’s water fund, you agree to pay up for engagement and shareholder advocacy.
Fidelity Select Environment and Alternative Energy Portfolio (FSLEX)
- Expense ratio: 0.85%
FSLEX invests in companies involved in renewable energy, energy efficiency, and other environmental activities. (FSLEX doesn’t screen investments for ESG principles.)
The fund’s low rating from Fossil Free Funds may come as a surprise. But polluting companies are often the ones funding renewables and alternative energy. For example, FSLEX has a position in Cosan SA, a Brazilian provider of bioethanol, an alternative fuel made from sugarcane. But Cosan is also a natural gas distributor, which leads to ESG rating penalties.
The fund is very concentrated. The top 10 holdings (out of 59) are over 50% of the fund’s assets. Tesla is the biggest holding. The fee (0.85%) is reasonable compared to other actively managed mutual funds.
Balanced ESG funds
Balanced funds invest in stocks and bonds, typically holding 60% of assets in stocks and 40% in bonds. Balanced funds are an easy solution if you want:
- A lower risk approach because you will own a lot of bonds
- The simplicity of owning just one fund
Balanced funds can be actively managed or passive, and there is a wide selection of conventional options. Most mutual fund managers, including Vanguard and T. Rowe Price, offer balanced funds. But several ESG fund managers like Pax and Calvert also provide balanced funds.
Here are the three largest ESG balanced funds:
|Fund||Ticker (Investor Shares)||Investments||Expense Ratio||Assets ($m)||2020 Performance||Inception Date||Fossil Free Funds Rating||MSCI Rating||Sustainalytics Rating|
|Pax Sustainable Allocation Fund||PAXWX||50% U.S. equities, 10% foreign equities, 40% bonds||0.92%||2,300||16.2%||1971||A (Pax Large Cap Fund)||A||5 / 5|
|Calvert Balanced Fund||CSIFX (Class A)||60% equities, 40% bonds||0.93%||1,100||15.4%||1982||B||A||4 / 5|
|1919 Socially Responsive Balanced Fund||SSIAX (Class A)||70% U.S. equities, 30% bonds||1.26%||643||20.6%||1992||A||A||5 / 5|
Data as of 3/31/2021
Pax Sustainable Allocation Fund (PAXWX)
- Expense ratio: 0.92%
Launched in 1971, PAXWX invests 50% of its assets in U.S. stocks, 10% in foreign stocks, and 40% in bonds. Rather than pick individual stocks and bonds, the fund’s managers invest in eight Pax World ESG stock and bond funds to get to the right allocation.
Top equity holdings are large-cap U.S. stocks like Microsoft, Apple, and Amazon. The underlying funds own very few energy stocks or bonds. The biggest equity fund that goes into PAXWX, Pax Large Cap Fund, has an A rating from Fossil Free Funds. The fund also gets five globes from Sustainalytics.
Overall, PAXWX is a good balanced mutual fund option. Pax World is committed to ESG strategies and engagement. However, you could pay less than 0.92% if you buy equity and bond ETFs, or if you use a robo-advisor with an ESG option.
Calvert Balanced (CSIFX)
- Expense ratio: 0.93%
Calvert Balanced Fund invests in large-cap U.S. stocks and investment-grade bonds in a roughly 60%/40% equity/bond split. The fund has $1.1 billion in assets, charging a 0.93% fee. CSIFX returned 10.8% and 9.1% over the past five and ten years, respectively.
Top holdings are Microsoft, Apple, and Amazon, which is typical for ESG funds. The team scores companies on material sustainability issues using Calvert’s ESG framework. Calvert doesn’t invest in oil and gas companies that own reserves, but they still buy oilfield services names like Baker Hughes. Although the fund is not 100% fossil free, energy holdings are light relative to any benchmark. CSIFX has a B rating from Fossil Free Funds.
1919 Socially Responsive Balanced Fund (SSIAX)
- Expense ratio: 1.26%
Launched in 1992 by the 1919 Investment Council, SSIAX invests 70% of its assets in U.S. stocks and 30% in investment-grade U.S. bonds. 1919’s investment approach integrates ESG factors, such as fair employment practices. Managers also exclude fossil fuels, tobacco, and weapons.
Although the top 3 investments (Apple, Microsoft, and Amazon) mirror many other funds, SSIAX has fewer holdings than other balanced funds; it owns 49 equities and 135 bonds. This strategy has worked for them in the past.
The fund charges very high fees (1.26%), even compared to other mutual funds.
💰 Our pick
Pax Sustainable Allocation Fund (PAXWX) has solid ratings and almost no fossil fuel exposure. It also adds international equities. The fund manager exclusively runs ESG strategies and engages with companies on sustainability issues.
🔔 Interested in adding ETFs to your portfolio? If yes, read more on ESG ETFs here.