What is the difference between ESG and non-ESG funds?
Environment, social, governance (ESG) funds differ from their non-ESG counterparts in how they view impact and how they construct and manage their portfolios. Many ESG fund managers and institutions, along with their investors, are concerned about company governance, racial and gender equity, and health and well being, as well as issues like gun violence, climate change and deforestation, and human rights. This sort of investment ethos tends to play out in portfolio construction and management in one – or several – of the following strategies:
- Positive screening: investments in sectors, projects, or companies that exhibit positive ESG performance relative to industry peers.
- Negative screening: exclusion of sectors or companies involved in activities deemed unacceptable or controversial.
- ESG integration: explicit and systemic inclusion of ESG factors into managers’ financial analysis.
- Impact investing: targeted investments aimed at solving social or environmental problems.
- Shareholder advocacy: engagement with corporate leadership to push for positive environmental and social policies.
As an example, consider Green Century Funds, a leader in the environmentally and socially responsible investing field. They offer a suite of mutual funds that all abide by Green Century’s Sustainable Investment Strategy. The strategy involves positive screening – the funds seek to invest in environmental innovators and sustainable companies, including companies involved in energy efficiency, renewable energy and sustainable agriculture. They also practice negative screening – the fund avoids dangerous and harmful industries including civilian and military weapons, tobacco, producers of genetically modified organism (GMOs), fossil fuels, and nuclear energy. In fact, all of the company’s mutual funds are completely fossil fuel free, which means their investing excludes companies that explore for, extract, process, refine, and transmit coal, oil, and gas, as well as companies that burn fossil fuels to make electricity.
Another element of ESG strategy involves shareholder engagement. Each year, coalitions of fund managers, pension funds and other interested groups, like As You Sow and the Interfaith Center on Corporate Responsibility (ICCR), work with dozens of companies across many sectors to adopt stronger social and environmental practices and policies. As an example of successful shareholder engagement, several non-partisan groups worked in partnership to push McDonald’s to restrict the use of medically important antibiotics in its beef supply chain. Another example was a shareholder proposal at General Mills’ annual meeting that implored the company to begin tracking and reducing the use of toxic pesticides in its supply chain. As an example from our own experience, two years ago, several groups asked NorthFork’s team to present resolutions on separating the roles of CEO and Chairman of the Board, as well as political spending and lobbying disclosures at AT&T’s annual shareholder meeting held in Billings, MT.
The ESG Difference: Portfolio Construction
To illustrate ESG-focused investing in action, let’s compare Green Century’s International Index Fund (GCINX) with Fidelity’s Global Index Fund (FSGGX). Both funds exclude U.S. corporations from their portfolio and fall into Morningstar’s “Foreign Large Blend” category. They also both invest the majority of their funds in developed European markets. The compositions of their portfolios differ markedly, though. GCINX has zero holdings in both the Energy and Utilities sectors while FSGGX slightly over-weights both sectors compared to the category average. In accordance with Green Century’s investment strategies, there are no oil companies anywhere in the portfolio, while FSGGX has two oil companies within its top 10 holdings – BP and Total, two of the seven “supermajor” oil companies in the world.
The Advantages of an ESG Fund
At NorthFork, we embrace the thesis that ESG-focused funds may avoid unnecessary risk and create long-term social, environmental, and financial return for investors. ESG funds tend to monitor companies more closely than their non-ESG counterparts, so ESG funds are more likely to identify and avoid companies whose activities may damage their reputation or worse, create real harm to people and the planet, thereby diminishing shareholder value.
Beyond using ESG-funds to manage investment risk, NorthFork believes there is inherent value in investing in enterprises that seek to treat human and natural capital with respect and implement business practices that are geared toward creating a more enduring future.
NorthFork Financial manages portfolios which include Green Century funds, including GCINX. NorthFork Financial does not manage portfolios which include FSGGX. This article is the opinion of NorthFork Financial only; no other organization or individual contributed to or influenced the reporting.