While we cannot know anything with 100 percent certainty, Earth’s climate is unarguably undergoing dramatic changes. Record-breaking summer heat waves, ice-free passages through the previously frozen seas, more brutal storms, and rising sea levels are plaguing the planet.
While there is some politically motivated disagreement about the primary cause of these changes, climate scientists almost universally agree that carbon dioxide is at geologically historic levels. The Intergovernmental Panel on Climate Change is a body of 195 member nations established to assess the scientific evidence, and they’ve determined that greenhouse gas emissions—driven mainly by economic and population growth—are now higher than ever. This has led to atmospheric concentrations of carbon dioxide, methane, and nitrous oxide that are unprecedented in at least the last 800,000 years.
But we have successfully faced similar problems in the past. Think back to the 1970s. The United States was facing another environmental crisis. The air was unbreathable in many cities. Entire lakes were on the brink of death. Rivers were poisonous sludge flows. We were running out of oil. Overpopulation threatened possible famine. How did we respond? We faced the threats head on and spent billions cleaning our physical environment.
“Put your money where your mouth is” is a phrase we use to call out hypocritical behavior. If you are convinced that human behavior is damaging our environment, you can now, literally, put your money where your mouth is (or where your beliefs lie). It’s called sustainable or environmental investing.
Over the past decade, some mutual fund firms have created portfolios that allow investors to focus their funds in companies that take a more environmentally responsible approach to doing business.
Most mutual funds of this type are referred to as ESG (Environmental, Social, and Governance) funds. These offer portfolio managers a bit more leeway in their corporate selection criteria and don’t focus solely on environmental issues.
In the past, sustainable investing options haven’t been particularly compelling, with broker commissions and high annual fees. In addition, most funds are actively managed portfolios of just a few stocks, increasing the risk for investors.
But just last year, Vanguard entered the fray with two new exchange-traded funds featuring an equity index fund with environmental, social, and governance screens applied to eliminate those firms that exhibit irresponsible behavior. These new Vanguard products accomplish a couple of things:
First, Vanguard’s expenses are dramatically lower than the others. For example, Vanguard ESG US Index ETF (symbol: ESGV) charges just .12 percent per year. Compare that with the Putnam Sustainable Leaders (symbol: PNOPX) with a 5.75 percent up-front commission and an annual fee of .99 percent.
Then there is the volatility reduction that diversification tends to provide. Putnam’s fund recently owned just 65 stocks, while the Vanguard ETF holds over 1,500 stocks.
One early adopter of the sustainability model was a fund company called Dimensional Funds (DFA). More than 10 years ago, DFA decided to take its passive approach to build science-based portfolios and apply a patented set of screens to shift capital from companies with the worst sustainability scores toward companies with the best scores. These screens focus primarily on greenhouse emissions, but also factor in several other environmental and social variables.
The sophisticated nature of Dimensional’s investing approach and sustainability metrics combined with massive diversification and low fees make the DFA Sustainability funds some of the better options for environmentally and socially responsible investors. However, due to the special investor requirements of DFA funds, they are only available through a select group of registered investment advisers. To find a list of advisers near you, visit dfaus.com/individual.
The host of the nationally syndicated Don McDonald Showfor over 20 years, Don now co-hosts Talking Real Money with Tom Cock on Seattle’s KOMO radio Saturdays at noon (talkingrealmoney.com). Don also publishes the investing magazine, real investing journal (realinvestingjournal.com).