Socially responsible investing — sometimes known as environmental, social and governance or ESG investing — used to be a fringe topic or an afterthought for many portfolios. After all, early ESG screens often were simply removing certain “unwanted” sectors for the broad market.
And given that those unwanted sectors — guns, tobacco, booze and gambling — have traditionally been some of the market’s best performers, ESG has historically underperformed the broader market.
However, this isn’t your grandpa’s ESG portfolio.
As of the end of 2014, investors have parked more than $6.2 trillion in investments across the globe that incorporate environmental, social and governance factors. And those investments have finally started to pay off.
According to Deutsche Bank, stocks with ESG metrics now outperform those without them on total returns 89% of the time. Similar outperformance metrics can be found in accounting/earnings wins and lower costs of capital. Part of the reason is that a wide range of firms — from technology to even boring industrials — now think about ESG when designing products and policies.
You can now do good and get a good return as well.
And adding a dose of ESG is pretty easy at this point. There are numerous ways to bet on the stocks that adhere to various environmental, social and governance factors. Here’s one ESG stock, one exchange-traded fund (ETF) and one mutual fund to get you started.
ESG Investing: Google (GOOGL)
ESG investing is hardwired into tech giant Google’s (GOOG, GOOGL) DNA. After all, the firm’s mantra is “Don’t be evil.” Under that banner, the firm continues to be a beacon of ESG light with its various corporate polices, projects and developments.
But that doesn’t mean it’s not a cash flow and profit-making machine. Its core search and ad revenue businesses bring in billions into the tech firm. And that cash has allowed GOOGL to run a variety of side businesses.
Many of those ventures are going to become a lot stronger, based on its new corporate restructuring. Dubbed Alphabet, the new company will allow “Google” to continue being a cash cow, while moving some of the side businesses and projects into the forefront — meaning they’ll finally begin to pull their weight on the earnings front. You really could be looking at the Berkshire Hathaway of tech.
For investors wanting to dip their toes into ESG investing, GOOGL makes great first step. You get all the benefits of a socially conscious company that actually makes oodles of money.
ESG Investing: iShares MSCI KLD 400 Social ETF (DSI)
For those investors looking for an indexed approach to ESG investing, the iShares MSCI KLD 400 Social ETF (DSI) should be their first stop. DSI tracks one of the first ESG indices ever launched and covers the entire market cap spectrum of U.S. stocks from large caps down to small caps.
Index provider MSCI kicks out all tobacco, gambling, firearms/weapons, nuclear power, adult entertainment and GMO seed producers in the USA Investable Market Index. It then uses various socially responsible investing screens to score and weight DSI’s holdings and create its underlying portfolio. DSI caps its holdings at 400.
That portfolio of 400 stocks isn’t just made up of renewable energy firms and similar “tree-hugging fare.” There are some serious winners among DSI’s holdings, including firms like Disney (DIS) and Gilead Sciences (GILD). The presence of these companies just highlights the notion that a variety of firms are applying ESG to how they run their businesses.
DSI and its parent index have been pretty good performers as well. In the past three years, DSI has posted an average annual return of 17.1% — slightly edging out the broad all-in-one U.S. index.
Expenses for DSI run a cheap 0.50% — or $50 annually per $10,000 invested.
ESG Investing: TIAA-CREF Social Choice Equity Retail (TICRX)
Due to its academic heritage, financial services giant TIAA-CREF is one of the largest investors in ESG-related funds. It has numerous options, but the $2.7 billion TIAA-CREF Social Choice Equity Retail Mutual Fund (TICRX) is the flagship product for investors not covered by a managed retirement plan.
Like most ESG investing vehicles, TICRX applies various screens to create its underlying portfolio. The difference is that TIAA-CREF is able to leverage its massive in-house ESG research department to pick and choose the best stocks. The fund’s evaluation process looks for those companies that have strong environmental records, are dedicated to serving their local communities, use fair labor practices and ethical management techniques.
Currently, TICRX has about 20% of its portfolio in financial firms, with tech and healthcare occupying the second and third spots. Top holdings include Berkshire Hathaway (BRK.A, BRK.B) and Johnson & Johnson (JNJ).
On the returns front, TICRX has been pretty decent. Over the Past 10 years, it has produced an average annual return of 7.28%. That’s slightly less than the Russell 3000. However, TICRX has managed to do so with less volatility and has had a smoother ride than its benchmark.
Expenses for the ESG fund are cheap at 0.46%.
As of this writing, Aaron Levitt was Long the TIAA-CREF CREF Social Choice Account (R3) and is a plan participant at the firm.
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