Two of the largest asset managers in the world, BlackRock and Vanguard, are getting in on the massive growth in Socially Responsible Investing. This is a clear sign that SRI is now mainstream and companies will need to pay attention to the ESG screens being used to evaluate how they do business. It is exciting to think about the impact individual investors have had by demanding investment options that better align with their values, but it’s worth checking under the hood of these new Exchange Traded Funds before adding them to a portfolio.
The Vanguard ESG U.S. Corporate Bond ETF (VCEB) is its first bond ESG ETF for U.S. investors. The fund is tied to the U.S. corporate bond market. Vanguard now offers a handful of index and actively managed ESG funds.
BlackRock’s iShares launched a new suite of ETFs that track underlying indexes that are ESG screened and include the following:
- iShares (XVV) tracking the S&P 500 Sustainability Screened Index
- iShares (XJH) tracking the S&P MidCap 400 Sustainability Screened Index
- iShares (XJR, 0.12%) tracking the S&P SmallCap 600 Sustainability Screened Index
Advantages to investors include:
- Broad diversification
- Low fees
- ESG sustainability screens
- Structure of an ETF – which can offer advantages over standard mutual funds
The main disadvantage has more to do with the individual investor’s goals than the offerings themselves. Each asset manager offering ESG investments has their own criteria that they use to evaluate companies. If an investor desires to avoid all companies connected to fossil fuels for example, then a deeper evaluation is needed to know if those types of companies will actually be screened out.
Two places where an investor can usually go to evaluate investments based on ESG scores are Morningstar and Fossil Free Funds. Currently, these ETFs are too new for any data to be provided. But, because these ETFs attempt to track an index, we are able to read the fine print (literally, fine print at the bottom of any literature on the fund – that hardly anyone ever reads). Here you can get an idea of what types of companies are excluded. Below you will find the disclaimer for the index associated with the new Vanguard offering. Although “ownership” of coal companies and companies owning oil and gas “reserves” are listed, this does not mean that there are not companies connected deeply with these industries that will not be excluded.
Passive or Index-type investing has some advantages, but if your investment goals include making every attempt to have your dollars match the causes you care about, you might need to look elsewhere. Fortunately there are many actively managed ETFs and Mutual Funds that allow for more transparency and specifically directed ESG screening criteria. We have highlighted many of these in the past on this blog and will continue to do so – stay tuned.
*The Bloomberg Barclays MSCI US Corporate SRI Select Index is a USD-denominated benchmark that includes investment grade, fixed-rate and taxable corporate bonds from both developed and emerging markets issuers. The index excludes the bonds of companies that MSCI determines engage in or derive substantial revenue from one or more of the following activities: producing adult entertainment; producing alcohol or alcoholic products; operating or supporting the operation of gambling activities; manufacturing, distributing, retailing, licensing, or supplying tobacco products; manufacturing nuclear weapons or nuclear weapons components; manufacturing chemical and biological weapons components, cluster munitions, landmines or depleted uranium weapons; manufacturing conventional weapons, conventional weapons components, or conventional weapons support systems and services; manufacturing, producing or selling civilian firearms or small arms ammunition; owning or operating nuclear power plants or active uranium mines, enriching and processing uranium, designing and engineering nuclear reactors, supplying key nuclear-specific products or services; genetically modifying plants for agricultural use or human consumption; or ownership of thermal coal, oil and gas reserves, as well as power generation from these sources.
Jack Schniepp is a CERTIFIED FINANCIAL PLANNER™ (CFP®, ChFC®) , financial advisor and the owner of Cascade Financial Strategies. CFS is a registered investment advisor licensed in Oregon, California, Washington, Arizona and Idaho. They specialize in socially responsible investing which integrates environmental, social, and corporate governance (ESG) criteria into portfolio construction.