How to buy an ESG fund now that Inflation Reduction Act is law

Funds that allocate investor money around ESG themes held $357 billion at the end of 2021 — more than four times the amount three years earlier, according to Morningstar, which tracks data on mutual funds and exchange-traded funds.

According to Morningstar, investors poured $69.2 billion into ESG funds, also known as sustainable or impact funds, last year, an annual record.

These remedies come in different flavors. Some may seek to promote gender or racial equality, invest in green energy technologies, or avoid fossil fuel, tobacco, or weapons companies, for example.

According to survey data from Cerulli Associates, women and younger investors (under 40) are most likely to be interested in ESG investing. According to the Financial Planning Association, about 34% of financial advisors used ESG funds with clients in 2021, up from 32% in 2020.

According to Morningstar, there are more than 550 ESG mutual and exchange-traded funds available to US investors – more than double the number five years ago.

“A single investor has a lot more [ESG options] and can build a portfolio in a way that wasn’t possible 10 years ago,” Michael Young, manager of educational programs at the Forum for Sustainable and Responsible Investing, told CNBC. “Almost all [asset] Category I can think of has a fund option, so we’ve come a long way.”

But fund managers can be different in how strict they are about investing your money – which means the green fund you buy may not be as “green” as you might think.

Here’s an example: Some fund managers “embed” ESG values ​​when choosing where to invest, but this strategy may only play a supporting (rather than central) role. Conversely, other managers have an explicit ESG mandate that serves as the linchpin of their investment decisions.

But investors may not know the difference between these approaches.

The Securities and Exchange Commission proposed rules in May that would increase transparency for investors and help them choose the ESG fund that best represents their values. The rules would also tackle “greenwashing,” the practice whereby asset managers mislead investors about ESG fund holdings.

Most recently, in a 6-3 ruling in June, the Supreme Court stripped some of the EPA’s authority to curb planet-warming carbon emissions from US power plants. Fossil fuel power plants are the country’s second largest source of carbon pollution after traffic.

All of this might make you think: how do I get started? And how can I be sure that my investments really align with my values?

According to ESG experts, there are some simple steps investors can take.

One way to start is by examining the money manager, which Align Impact’s Willskytt says serves as a good “shorthand” for investors.

Some companies are focused on ESG and have a long history of investing that way — both are encouraging signs for people serious about values-based investing, he said.

Investors can get an idea of ​​a company’s commitment by looking at its website and seeing if ESG is displayed as a key focus, he added. From there, investors can choose from the available funds of this company.

“It’s definitely a red flag if you can only find the bare essentials [website] information,” said Jon Hale, director of sustainability research for the Americas at Sustainalytics, which is part of Morningstar. “It suggests that exposure may not be as high as other funds.”

Examples of ESG-focused companies include Calvert Research and Management and Impax Asset Management, Willskytt said. Nuveen, which is owned by TIAA, also has a relatively long track record of ESG investing, he added.

Morningstar ranked Calvert and Pax, along with four others (Australian Ethical, Parnassus Investments, Robeco and Stewart Investors) as category leaders in a 2020 assessment of ESG engagement levels. However, not all are aimed at US individual investors.

Another six, including Nuveen/TIAA, ranked one notch below in the Advanced ESG category.

“If you have confidence in the manager, the funds will be more or less strong from an ESG perspective,” Willskytt said. “Then it’s all about finding the flavors that work for you.”

However, there is a downside. Despite the growth of ESG funds, investors may not yet find it easy to find a fund that fits a specific theme, depending on their niche. There are many climate-focused funds and broad ESG funds that consider many different value-based filters, for example, but something like a weapon-free fund is harder to find, experts say.

Most, 70%, of sustainable funds are actively managed, according to Morningstar. Depending on your current holdings, they may charge a higher annual fee than the current funds in your portfolio.

Investors who want to learn a little more about ESG before taking the plunge can take a free fundamentals course from the Sustainable and Responsible Investing Forum.

Investors can also start by searching some free mutual fund and ETF databases.

The Sustainable and Responsible Investing Forum has a database that allows investors to sort ESG funds by categories such as asset class (e.g. equity, bond and balanced funds), issue type and minimum investment.

However, this list is not exhaustive – it includes funding from the forum’s member companies. However, the fact that the company is a member could be reliable evidence of the wealth manager’s ESG rigor, Young said.

As You Sow is another organization that can help investors find funds that are, for example, fossil fuel free, equitable, gun free, prison free, gun free, and tobacco free. It ranks the top funds by category.

Alternatively, investors can use the As You Sow website to assess how well their current investments align with their values. You can enter a fund’s ticker symbol, which will generate a fund score by different value categories.

Other companies also assign ESG ratings to specific funds. For example, Morningstar awards a certain number of “globes” (“5” being the best score) to allow investors to assess the ESG scope of the fund. Morningstar has an ESG screener that investors can also use to filter by fund based on specific parameters.

One caveat: The Globe system and other third-party ratings do not necessarily signal an asset manager’s ESG intentions. In theory, a fund could happen to have excellent ESG ratings, not because of a manager’s focus.

Investors can also use fund databases to identify ESG investments they might like and then research the asset management firm to see the firm’s overall commitment to ESG.

For investors who aren’t as do-it-yourself oriented, working with a financial advisor knowledgeable about ESG can be the surest way to know your investments best align with your values ​​and your overall portfolio and your investment goals. For example, advisors may have more advanced screening tools compared to a retail investor.