Investors can finally earn a little income on their cash, with money-market and short-term bond funds yielding 2% to 4%.
But a few exchange-traded and mutual funds have launched lately that offer income with a socially responsible sheen—using environmental, social, or governance, or ESG, criteria in their investment process.
Calvert Ultra-Short Duration Income NextShares
ETF (CRUSC) and the
TIAA-CREF Short Duration Impact Bond
fund (TSDBX) both launched last year; each one focuses on companies that score well on ESG factors, according to the firms. The Calvert ETF has a 30-day Securities and Exchange Commission yield of 3%. The TIAA fund yields 2.9%.
Socially responsible money-market funds are also rolling out.
asset-management division launched DWS ESG Liquidity fund (ESRXX) in November, repackaging an existing fund with ESG factors. The fund is aimed at institutional investors with a minimum investment of $1 million.
Another sustainable money-market fund may soon be coming from
The firm filed registration paperwork in late January for BlackRock Liquid Environmentally Aware Fund or LEAF. The A-class shares of LEAF will have a $1,000 minimum investment, according to its registration statement.
ESG funds vary widely; some are highly restrictive, excluding entire industries such as oil-and-gas production or defense contractors; other make allowances for companies if they report on their carbon footprint, for instance, or buy carbon credits. If a bank earns less than 5% of revenue from lending to mining companies, it might still pass a sustainable-investing screen. The same holds true for social or governance factors; what qualifies as “good” is in the eye of the beholder.
Nonetheless, demand for these funds is growing, particularly among institutional investors such as public pension plans and insurance companies. “There’s a large and growing cohort of institutions that want these funds,” says Henry Shilling, a former Moody’s analyst and founder of sustainableinvest.com. Institutional investors are increasingly using ESG screens as a measure of credit risk, he adds, noting that it may help them avoid blowups like the recent bankruptcy of
Pacific Gas and Electric
(PCG). The utility defaulted on its commercial paper in 2001 and the credit ratings of its holding company were recently downgraded by Moody’s.
Indeed, while there’s plenty of interest in ESG among individual investors, that’s not the source of big money. Net inflows into sustainable mutual funds and ETFs amounted to just $11 billion in 2018, or 4.6% of the $390 billion invested in these types of funds at the end of 2018, says Shiller. That’s a pittance compared with the estimated $12 trillion of institutional assets pegged to sustainable-investing, according US SIF, an advocacy group for ESG investing.
Are these new fixed-income funds really socially responsible? It depends on your criteria. BlackRock, for instance, says it will use its screening methodology and third-party scoring to weed out non-environmentally friendly firms. Companies involved in fossil-fuel mining, refining, and coal or nuclear power production will be excluded from the fund. BlackRock plans to devote 5% of the fund’s management fees to carbon credits. And the firm says it will work with the World Wildlife Fund on an annual conservation report. Whether these measures will qualify the fund for investors who want strict ESG guidelines remains to be seen.
TIAA-CREF says it prioritizes bonds with a “direct impact across multiple sustainable and socioeconomic themes without compromising return potential.” A glance at its portfolio reveals that it holds lots of U.S. government debt, mortgage-backed securities, bank loans, and asset-backed securities—spanning a wide gamut. Holdings include debt issued by everyone from the North American Development Bank to
(TERP), a renewable power company.
Group (GS), and
Bank of America
(BAC), along with receivables and debt issued by auto makers like
(F), car-rental business
(KHC), and personal-loan providers such as Prosper Marketplace.
“All of the holdings comply with Calvert principles for responsible investment,” said fund manager Vishal Khanduja in an email to Barron’s. “We have teams of experts who truly understand financial materiality and that forms the basis of our ESG research.” The companies may not necessarily have a direct environmental impact, he adds, “so it’s understandable that many of the names may not scream ‘responsible investments,’ but they have been carefully evaluated.”
If none of this sounds appealing, consider a green bond fund. Green bonds are issued to finance environmental or conservation projects such as renewable energy or natural-resource protection. Big banks like
(C) have started issuing the bonds, and they’re growing steadily. More than $500 billion in green bonds has been issued over the last decade, according to Shilling, including debt issued by development banks, countries like France, and scores of corporate and municipal issuers.
Several mutual funds and ETFs now focus on green bonds. Mutual funds include
Calvert Green Bond Fund
(CGAFX), yielding 2.3% and
Mirova Global Green Bond Fund
(MGGNX), with a 1.5% yield. ETFs include
VanEck Vectors Green Bond
(GRNB) with a 1.5% yield and
iShares Global Green Bond
(BGRN), yielding 1.6%.
Investors may earn higher yields in traditional money-market or other fixed-income funds. But giving up a bit of income may be a small price to pay for going green and, in theory, doing something good for the planet.
Write to Daren Fonda at firstname.lastname@example.org