Investors today are increasingly considering environmental, social, and governance (ESG) factors when making investment decisions. ESG funds, which align with these principles, have seen a significant rise in popularity, offering investors a way to support companies with positive societal impacts while potentially achieving financial returns. In this guide, we’ll explore the best-performing ESG funds and the cheapest ESG ETFs for 2024, helping you make informed decisions about your investments.
Understanding ESG Funds
ESG funds are investments that are graded using ESG principles. They invest in companies that prioritize sustainability, social responsibility, and good governance practices. By investing in ESG funds, you can support companies that are committed to making a positive impact on the world, such as those with low carbon footprints or diverse leadership boards.
Unlike individual stocks, ESG funds are a collection of multiple stocks grouped together. This diversification can help decrease risk, as the fund holds shares of many companies rather than just one.
Best-Performing ESG Funds
Here are some of the best-performing ESG mutual funds:
- Vanguard Mega Cap Growth Index Instl (VMGAX) – 5-year return: 19.59%
- Baron Durable Advantage R6 (BDAUX) – 5-year return: 19.35%
- Baron Durable Advantage Institutional (BDAIX) – 5-year return: 19.34%
- Neuberger Berman Large Cap Growth Inst (NGDLX) – 5-year return: 18.9%
- Amana Growth Institutional (AMIGX) – 5-year return: 17.9%
- Harbor Capital Appreciation Instl (HACAX) – 5-year return: 17.5%
- American Century Growth Inv (TWCGX) – 5-year return: 17.48%
Cheapest ESG ETFs
ESG ETFs offer some of the lowest-cost options for ESG investing. Here are some of the cheapest ESG ETFs available:
- Gabelli Love Our Planet & People ETF (LOPP) – Expense ratio: 0.00%
- SPDR Portfolio S&P 500 ETF (SPLG) – Expense ratio: 0.02%
- Vanguard Total Bond Market ETF (BND) – Expense ratio: 0.03%
- iShares Core U.S. Aggregate Bond ETF (AGG) – Expense ratio: 0.03%
- Vanguard Total Stock Market ETF (VTI) – Expense ratio: 0.03%
- iShares Core S&P 500 ETF (IVV) – Expense ratio: 0.03%
- Schwab U.S. Broad Market ETF (SCHB) – Expense ratio: 0.03%
ESG Benefits
Investing in ESG funds allows you to support social and environmental initiatives you believe in while building your portfolio. Studies have shown that ESG funds can match or outperform traditional funds in terms of performance, while also reducing overall downside risk. This makes ESG investing not only socially responsible but also potentially financially rewarding.
How to Choose the Best ESG Funds
When choosing ESG funds, consider the following factors:
- Active vs. Passive Funds: Decide between actively managed and passively managed funds based on your investment goals, experience, and tax situation.
- Impact Area: Choose funds that align with your values and support initiatives that matter to you.
- Existing Investments: Ensure your ESG funds complement your existing portfolio and don’t overinvest in a particular industry or asset class.
- Impact Assessment: Look for funds that provide impact reports to assess the real-world effects of your investments.
Invest Responsibly with ESG Funds
Investing in ESG funds allows you to put your money to work for causes you believe in, influencing the behavior of large corporations for the greater good. Whether you’re motivated by societal impact, financial performance, or risk reduction, ESG funds offer a compelling option for responsible investing.
Evaluating ESG Funds: What to Look For
When evaluating ESG funds, it’s important to look beyond the surface and understand the underlying factors that drive their performance and impact. Here are some key considerations:
1. Sustainability Ratings: Many ESG funds are rated based on their environmental, social, and governance practices. Look for funds with high sustainability ratings, as these indicate a strong commitment to ESG principles.
2. Performance History: While past performance is not indicative of future results, it can provide insights into how well a fund has adhered to its ESG criteria and managed risk over time.
3. Expense Ratios: Consider the cost of investing in the fund, including management fees and other expenses. Lower expenses can improve your overall returns.
4. Portfolio Holdings: Review the fund’s holdings to ensure they align with your values and investment goals. Look for diversification across different sectors and industries.
5. Transparency: Choose funds that provide clear and transparent information about their ESG criteria, investment process, and impact reporting.
6. Impact Reporting: Look for funds that provide regular impact reports detailing the social and environmental outcomes of their investments. This can help you gauge the real-world effects of your investment dollars.
7. ESG Integration: Some funds integrate ESG factors into their investment decision-making process, while others use exclusionary screening to avoid companies that do not meet certain ESG criteria. Consider which approach aligns best with your values.
8. Risk Management: Evaluate how the fund manages ESG-related risks, such as climate change, regulatory issues, and social controversies. Funds that effectively manage these risks may offer more stable returns over time.
9. Investment Goals: Consider your own investment goals and risk tolerance when choosing an ESG fund. Some funds may prioritize impact over returns, while others focus on delivering competitive financial performance.
10. Professional Advice: Consider consulting with a financial advisor who specializes in ESG investing. They can help you navigate the complexities of ESG funds and tailor your investments to meet your specific goals.
Conclusion
ESG funds offer a compelling opportunity for investors to align their values with their investments. By carefully evaluating ESG funds based on sustainability ratings, performance history, expense ratios, portfolio holdings, transparency, impact reporting, ESG integration, risk management, and investment goals, investors can make informed decisions that support positive social and environmental change while potentially achieving competitive financial returns.