Green Investment Funds in the US

If you are a caring person, you may have wondered how your investments might impact the world around you. If you have ever thought this way, rest assured that you’re not alone.

In recent years, especially as the effects of climate change become increasingly harder to ignore, there has been a significant rise in the number of investors who not only want to grow their wealth but want to do so in a way that aligns with their morals. Investing in an oil company, for example, might be lucrative but it isn’t exactly making the world a better place.

A few decades ago, this ambition for ethical investment would have been dismissed as wishful thinking. But now, thanks to a growing awareness of the impact of our actions, it’s possible to do exactly that.

Read on for everything you need to know in my guide to green investment funds in the US.

Also Consider: Best Ethical Investment Funds

What are the best platforms for green investment funds in 2023?

If you want to grow your wealth effectively, it’s important to find the right investment platform. Here is our breakdown of some of the best investing platforms available today.

What are green investment funds?

Simply put, green funds are investment funds and products that promote socially and environmentally responsible business practices.

For example, they may emphasize investing in renewable energy projects and avoiding companies with harmful societal impacts, such as those involved in weapon manufacturing.

In the past few years, there has been a surge in interest for ethical investing, and this trend accelerated during the pandemic.

According to a study by Aviva, more than half of investors surveyed stated that the coronavirus outbreak has made them more likely to take sustainability into account when making investments.

What are the best-performing green funds to invest in?

There are a variety of green funds that you might choose to invest in. Below are a few that have become popular with investors over the past few years.

Please bear in mind that past performance is not an indicator of future performance. All investing carries risk, and you may get back less than you invest.

Vanguard ESG U.S. Stock ETF

The Vanguard ESG U.S. Stock ETF has rocketed in popularity recently with the well-known funds ESG, who offer combined solid returns and low costs in a package that is hard to beat. This is an indexed ETF with exclusionary principles that has delivered yields of 11.21% in one-year returns, 19.69% in three-year returns, and 16.05% in five-year returns since its inception.

Calvert International Responsible Index Fund (CDHIX)

Established in 2005, this fund selects positions in developed countries outside of the US with an emphasis on tech-sector leaders such as Japan and is a great choice for those wanting to trade ethically without radically altering their risk exposure.

BMO Responsible Global Equity Fund

This fund has had an impressive return of 240% in the last 10 years, making it the third most successful ethical fund in the world.

It typically focuses on companies with strong ESG credentials and avoids companies that are involved with fossil fuels.

iShares MSCI USA ESG Select ETF (SUSA)

iShares, by Blackrock, uses three MSCI ESG Research products to construct its portfolio: MSCI ESG Ratings, MSC ESG Controversies Score, and MSCI ESG Business Involvement Screening Research.

The fund has an expense ratio of just 0.25% and an excellent performance record.

Shelton Green Alpha Fund (NEXTX)

Offering three-year trailing returns of 21.4% this strong-performing fund only invests in companies that aim “to improve human well-being and increase economic efficiencies, while significantly reducing environmental risks and ecological scarcities.”

That said the expense ratio is somewhat higher and the fund does have sharp short-term swings in performance.

AllianceBernstein Sustainable Global Thematic Fund (ATEYX)

Investing in a mix of U.S. and international companies that are “broadly consistent with achieving the United Nations Sustainable Development Goals.”

This is an actively managed fund that tends to focus on ensuring a mix of small-cap, mid-cap, and large-cap firms.

What are the differences between passive and active green funds?

When it comes to funds, you may have the choice between investing in a passive or an active one. This may leave you wondering what the difference is. As you may have read in my previous guide to mutual funds, the main difference is in the goals of the fund and how it is managed.

Passive funds

To put it simply, a passive fund aims to deliver a return to investors that’s in line with a particular index. These tend to have a higher level of automation and a lower level of human oversight.

The performance of these funds typically mirrors the market since the fund manager is less involved with choosing which investments to hold in the fund. These are sometimes also known as “tracker funds”.

Active funds

While a passive fund aims to match a particular index, an active fund aims to beat it. To do this, these funds usually have an active fund manager who works with a team of analysts to find the best investments.

To pay for this team of specialists, these funds tend to have higher ongoing fees, and this can sometimes impact the returns. They can also have a higher risk than passive funds.

What are the benefits of green investing?

There are several benefits to investing in green funds but one of the main ones is that it can help an investor to align their portfolio with their morals. If you feel strongly about a particular issue, such as your carbon footprint or the use of controversial weapons, such as unmanned aerial drones, you can tailor your portfolio to match your conscience. There can also be valuable economic considerations too, as many of these funds actively invest in new technologies and new sectors with strong growth potential.

How do green funds perform?

There’s a widely held misconception that if you want to invest in an ethical way, you must compromise on returns. Thankfully, this isn’t true.

In recent years there has been a significant increase in the wealth invested in green funds. As you can see from the graph below, the total value of such funds more than doubled in the two years to 2020.

Source: Morningstar

What are the benefits of green funds?

One of the main benefits of ethical investing is that it can have greater resilience to market shocks, due to the type of investments they typically make. Over time, this can often translate into strong financial returns, as they are something of an outlier, they are less susceptible to downturns in the stock market that can cripple traditional industries.

According to a long-term study published in the Financial Times, most sustainable funds delivered higher returns than equivalent conventional funds over the last decade. This goes to show that sometimes investing with your heart, as well as your head, can be beneficial not just for your pocket but also for the world.

How do funds decide what to invest in?

Typically, there are two main methods that funds use to determine which companies represent a responsible investment: positive and negative screening.

Negative screening

In essence, negative screening is selection by omission.

Funds that use this methodology to pick products will avoid industries and companies with poor reputations. These may be environmental reasons, such as petrochemical companies but can also be due to poor ethical credentials, such as the weapons industry. Other reasons may include poor business practices, concerns over the treatment of individuals within the company, or the impact they have on their community and the wider world.

For example, managers of ethical funds may avoid companies from unethical sectors. This could include weapons or tobacco companies, which indirectly lead to deaths.

Negative screening can also be used to screen out companies that don’t line up with the fund’s values. For example, they may avoid businesses that are involved with animal testing.

Positive screening

Positive screening involves a fund manager actively choosing to support industries and businesses that align with the fund’s stated values.

For example, if climate change is a priority for the portfolio investors, then the fund manager will be looking to actively reflect this in their investment portfolio.

This may involve investing in companies that explore alternative energy sources and green technologies.

Both approaches have their positives and negatives, so if you want to invest in green funds, it’s important to do your research beforehand.

What is ESG investing?

If you’re interested in ethical investing, one of the most common strategies is “ESG” investing.

To put it simply, this is a term that describes the three main factors used to measure the sustainability and societal impact of a company.

What does ESG stand for?

The acronym stands for Environmental, Social, and Governance (ESG) criteria. Essentially, these ethical investments aim to consider the impact of an asset on the world, as well as its financial prospects.

What are environmental criteria?

When people hear the phrase “green investments”, for most people companies that work with alternative technologies such as solar or wind energy are probably the first thing that spring to mind.

This category typically deals with the conservation of the natural world and may consider issues like energy efficiency, pollution, and the carbon emissions of a company. In essence, a green investment is a business or fund that seeks ways to reduce harmful pollutants or use resources more sustainably

What are social criteria?

This criterion generally considers the relationship that a business has with its staff and the community at large. Socially responsible investing may consider issues like gender equality, working conditions, and customer satisfaction for this category.

What are governance criteria?

Governance factors typically assess the standards by which the company is run. For example, this may consider issues such as political lobbying, the pay of executives, and the fair election of board members.

Is ESG popular?

Yes. And in recent years, there has been a boom of interest in sustainable investing with ESG criteria as the guiding principle. According to the Financial Planning Association in 2021, about 34% of financial advisors used ESG funds with clients, up from 32% in 2020.

How did ESG perform during the pandemic?

As we touched upon in my previous article about going green with your investments, if you’re interested in ethical funds, you’ll be pleased to hear that many of them are performing well in the 2020s.

The coronavirus pandemic was the first real acid test for ESG investing to see if it really was possible to achieve good returns from ethical funds. And according to several studies, it is a test that ESG funds passed with flying colors, with companies with higher ESG ratings boasting better returns in almost every month of the lockdown.

Furthermore, according to Fidelity’s Putting Sustainability to the Test report, published in FT Adviser, stocks with stronger green credentials were significantly less prone to volatility in the market, falling far less when markets collapsed and rising less when they recovered.

Why did ESG funds perform so well during the pandemic?

One explanation for this performance is that ESG funds tend to invest in sectors such as tech and pharmaceuticals. Both sectors saw strong growth during the pandemic due to the demand for medicine and video conferencing software.

Furthermore, these funds typically had less exposure to sectors that struggled during 2020. For example, the lockdowns meant that there were fewer cars on the roads and many industries had to reduce or suspend operations. This led to a significant drop in the demand for fossil fuels.

If you invested in a company that dealt mainly with oil and gas extraction, your investment would have decreased in value during 2020.

However, since they tend to avoid stocks like airlines, heavy industry, and fossil fuels due to their negative environmental impacts, ESG funds were not as badly impacted by the resulting economic fallout.

What are the other types of investing?

While investing in ESG funds is one of the most popular investment strategies, there is a wide range of others that you could consider. Here are some examples:

Sustainable and Responsible Investments (SRI)

This strategy focuses on ethical, environmental, and social issues. SRI funds may choose to invest in companies that are working towards finding solutions to the climate crisis.

Impact investing

This involves investing in a way that delivers a measurable positive impact alongside financial return. Such funds may invest in companies that aim to reduce their carbon emissions by a set amount each year.

Dark green investing

This strategy heavily utilizes negative screening to avoid any company or industry that goes against its ethical criteria. For example, an investor using this method may avoid any company that supports animal testing.

Light green investing

In contrast to dark green investing, this strategy actively seeks out companies that make a positive contribution to the world, rather than simply excluding those that do harm. This may involve investing in environmental projects, for example.

Sustainable investing

This strategy typically focuses on environmental and social sustainability issues and may invest in companies that are actively looking to make a positive environmental impact, such as those that fight climate change or research renewable energy.

Are there other ways to invest in a green way?

While there are many advantages to investing, such as reduced stress and a greater inherent diversity of assets, there are other ways of green investing.

For example, you may want to consider investing with a robo-advisor, which can offer you a choice of portfolios that reflect your ethics and your attitude to risk.

However, if you’d prefer to do it manually, here are some of your options:

Shares

One of the main alternatives is investing directly by buying shares in individual companies with morals that align with your own. However, please be aware that this can be a very labor intensive investment method.

Furthermore, it’s important to bear in mind that investment platforms often charge transaction costs whenever you buy or sell a share. This can mean that constant tinkering with your portfolio can reduce your returns.

Bonds

If you are quite risk-averse but want your money to make a positive impact on the world, then you may be able to buy green and ethical bonds from companies whose practices you agree with.

Is ethical investing right for me?

If you want your portfolio to reflect your morals, a green fund can make a good investment. One of the main benefits of ethical investing is that if you only invest in companies that are conscious of their societal impact, you can make a positive change in the world.

Furthermore, as mentioned earlier, many ethical funds have shown strong performance during the pandemic, while many more conventional investments suffered. This is because they tend to make sustainable investments that are less impacted by market shocks.

How can speaking to an advisor help me?

If you want your money to make a positive global impact but you aren’t sure where to start, you may benefit from seeking professional advice.

Working with a financial advisor can help you make properly informed decisions, enabling you to invest ethically in the most effective way possible to grow your wealth. If you already have money invested in a green fund, they can advise you on whether to keep it there or if it could be growing more effectively in another fund.

If you want to choose your investments manually, they can help to explain the investment process and make it easier to understand. An advisor can also act as a sounding board to help ensure that you can invest with confidence.

Please note:

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

This article is for informational purposes only and does not constitute financial advice.