Climate change is real, and it's the most important issue facing our world today. Many people want to avoid investing in companies that contribute to global warming - they want their money to be invested in a way that is aligned with their values. It used to be very difficult and very expensive to find options for sustainable investing. Today, though, you can invest in environmentally sustainable funds cheaply and easily.
We use two main fund families to invest in environmentally sustainable funds - Dimensional Fund Advisors and Vanguard. The following provides a brief overview of each.
Dimensional Fund Advisors Sustainability Funds
Dimensional Fund Advisors provides great fund options that focus heavily on environmental impact. Apart from looking at greenhouse gas emissions and operational environmental management, they exclude or underweight companies cited for offenses such as: factory farming, cluster munitions, child labor, or tobacco. Unlike Vanguard, they also offer fixed income funds under their sustainability screening.
Here is an example of the effects of their US Core 1 Sustainability fund (data from 2018):
Two other important considerations in most socially responsible funds are social and governance factors. These include things like whether or not a company has a diverse board of directors, whether they have been cited for child labor laws, or whether they have a good relationship with local communities. DFA considers these factors in all of their funds, not just the sustainability funds, but the sustainability funds also focus on environmental impact.
Vanguard ESG (Environmental, Social, Governance) Investments
Here is a brief overview of Vanguard's ESG investing philosophy. Their approach is largely exclusionary, screening out companies, for example, that sell/manufacture tobacco or guns. The main limitation is that they only offer ESG stock funds, not bond funds, so you will have to look elsewhere for a sustainable fixed income option.
Other Alternatives for Sustainable Investing
We are always considering new options for environmentally sustainable funds to make sure that we are at the forefront of socially responsible investing. Another option for fixed income funds that we use is Calvert Impact Capital, whose portfolio consists of funds that lend to social enterprises, nonprofits, and mission-driven organizations often left out of traditional capital markets.
Is There a Downside?
Because of their nature, funds that screen companies for sustainability will almost always be more expensive than their normal index fund counterparts - they have to pay for the screening somehow! But Vanguard's main ESG fund only has an expense ratio of 0.12% compared to their regular US fund at 0.04%. Likewise, Dimensional's Core 1 Sustainability fund sits at 0.25% compared to their regular US fund at 0.19%. So the difference comes down to mere hundredths of a percent, which is well worth it if environmentalism is one of your core values.
There is a small amount of diversification lost in these funds. After all, they are excluding companies based on environmental criteria, so diversity will be reduced by definition. However, there is research showing that returns of sustainability funds don't suffer, and in fact may have lower risk than normal funds to get the same returns. Investing in companies that are environmentally responsible may therefore be a smart financial decision as well as earth-friendly.
The main takeaway is that, unlike in years past, environmentally responsible investing can be as financially sound as regular investing. Consider switching your investments over into sustainability funds, and talk with us if you have any questions about your options.