Socially responsible investing

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michaeljmroger
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Socially responsible investing

Post by michaeljmroger » Thu Mar 14, 2019 1:04 am

For personal reasons, I want to invest some money in a fund focusing primarily on environment and sustainability. I’ve identified VFTAX, ESGV and VSGX so far, but I’m not entirely sure how to make a choice as I’m new to ESG investing, and I couldn’t find much information about these three funds.

I want to take a decision based on tax-efficiency (it’s for a taxable account and I’m in a high tax-bracket) and on the fund’s focus on environnement. I’d prefer to stick with Vanguard funds (especially a mutual fund), but I’m open to other suggestions if there are better alternatives that match my criteria.

I’d greatly appreciate your guidance!

Topic Author
michaeljmroger
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Re: Socially responsible investing

Post by michaeljmroger » Thu Mar 14, 2019 2:37 am

I read a little bit more about the topic and it seems like the funds I listed above are only following some ESG “best practices”, but they aren’t investing in companies actually focusing on environmental causes.

It seems like iShares’ SDG and ICLN are much closer to what I’m looking for, although I’m a bit annoyed with the high ER and poor diversification. Any opinion on these funds and their tax-efficiency?

Daryl
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Re: Socially responsible investing

Post by Daryl » Thu Mar 14, 2019 5:41 am

Without commenting specifically on "Socially Responsible Investing", I did look at SDG and ICLN and they both have fairly significant variances compared to their stated benchmark. I can't tell what is driving that, but I would avoid an ETF that is unable to deliver what it promised.

Also, ICLN seems very concentrated in a handful of companies. The Top 10 companies represent over 51% of the holdings (weighted)

anil686
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Re: Socially responsible investing

Post by anil686 » Thu Mar 14, 2019 8:40 am

I think this is what makes socially responsible investing difficult per se. If you look for index-like funds that follow a rules based formula - you will not have the granularity that may be sought - like explained by the OP. That would leave you with numerous actively managed funds to choose from who make their portfolio more congruent with the OP’s wishes - but that comes at a much higher cost and tax inefficiency. JMO though...

There was also a great point brought up in a recent masters in business podcast that consumers have much greater influence on their beliefs not with investments but rather with consumer behavior. Selecting green energy options, avoiding straws, contributing to charitable causes that support their beliefs. Again, JMO though...


https://www.bloomberg.com/news/audio/20 ... nt-podcast

harmony
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Re: Socially responsible investing

Post by harmony » Thu Mar 14, 2019 3:58 pm

I owned iShares MSCI Global Impact ETF | SDG all of last year. I bought it to balance some sectors which, according to my own spreadsheet, were low. Last year SDG threw off more than double the dividends of any ESG/SRI mutual funds or ETFs that I own.

In the Ishares SDG fund literature you will read that the fund only invests in equities which are representative of the index. It does not invest in the entire index. The annual report is due out soon and I will be interested in how management explains last year.

Have you looked on Morningstar under the “Tax” tab? This allows you to compare taxes of several funds and ETFs. Way down at the bottom, it shows potential capital gains exposure for each fund.

A great tool for comparing the ESG and SRI parameters of ETFs is the Head-to-Head comparison tool at ETFdb.com. Click on the ESG button and it will compare two ETFs showing six ESG and SRI characteristics. There is also more granular data behind a pay wall.

not4me
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Re: Socially responsible investing

Post by not4me » Fri Mar 15, 2019 6:32 am

michaeljmroger wrote:
Thu Mar 14, 2019 2:37 am
I read a little bit more about the topic and it seems like the funds I listed above are only following some ESG “best practices”, but they aren’t investing in companies actually focusing on environmental causes.

It seems like iShares’ SDG and ICLN are much closer to what I’m looking for, although I’m a bit annoyed with the high ER and poor diversification. Any opinion on these funds and their tax-efficiency?
What different people mean when they say "socially responsible" is different & I think same can be said of "tax efficiency". Especially the latter is a relative term. So, won't really comment on them, but you asked for comments on the etf & I think there are concerns there aside. I looked at SDG mainly & noted it is quite small & thinly traded. The nature of a niche such as 'social investing' (not unique to that by any means) is that it will be concentrated & more costly. Its size & liquidity may not matter as much to you if you plan to buy once & hold very long term. However, it may also be liquidated in a few years if it doesn't grow.

I'd also caution against letting the "tax tail wag the dog". For all the reasons to buy or avoid these funds, I'd put taxes low on the list. But we all have different situations

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nisiprius
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Re: Socially responsible investing

Post by nisiprius » Fri Mar 15, 2019 7:50 am

In the days before I understood the relationship of risk and return, I used to invest in an actively managed balanced SRI (or ESG as we would now call it) fund, Pax World Balanced Fund (PAXWX). I have no complaints about it. However, I fooled myself into thinking that the fund was actually outperforming traditional balanced funds. That is, I thought I was "doing well by doing good," that goodness at heart was translating into money in my pocket, that there was no cost or downside to being socially responsible.

In reality, what I had was a perfectly good actively managed balanced fund, with a 1% expense ratio, that was taking some extra risk in very reasonable ways: a tilt toward midcaps, a significant inclusion of international stocks, and a tech tilt as a side effect of screening out polluters. All of these things happened to be doing well, and all of them represented extra risk, a small amount of sensible extra risk.

Source

The extra risk meant that the superior performance was just a slight magnification of the market during a time when it was going up:

Blue, PAXWX (socially responsible fund); Orange, VBINX (index fund)
Image

And just as it had risen a bit more than Vanguard Balanced Index, when the market fell, it fell a bit more than Vanguard Balanced Index and gave back all the outperformance it had gained:

Image

So I didn't feel bad about it, but then one day someone in this forum suggested that we calculate and add up the absolute dollar numbers of our fund expenses. PAXWX, which by then was only a token 10% of my portfolio, had almost a 1% expense ratio, while the rest of my portfolio was Vanguard index funds, and to my surprise I realized that PAXWX was costing me more than the rest of my portfolio combined.

So I gave a shrug and exchanged my PAXWX for Vanguard Balanced Index.

What's my point? Well, I'm not opposed to SRI/ESG investing. I do not believe, as some seem to, that the love of money is the root of all virtue. I do not feel an obligation to Adam Smith reach for the most dollars, no matter what. But I do think that you have to acknowledge that ESG investing is a compromise, and is inhibiting you from making the same choices you'd make without it.

Therefore, if you are going to go in for it, I would do my best to make some assessment and evaluating of what else, besides selecting stocks, the fund company and, if its an index fund, the index provider, is doing. Most of them have "corporate responsibility" efforts ongoing, in which they try to influence corporate behavior--"think of the great press release you can issue if you can just get listed in the FTSE4GOOD index, and you're so close if you just do this one thing."
Last edited by nisiprius on Fri Mar 15, 2019 7:54 am, edited 2 times in total.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

Valuethinker
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Re: Socially responsible investing

Post by Valuethinker » Fri Mar 15, 2019 7:52 am

michaeljmroger wrote:
Thu Mar 14, 2019 1:04 am
For personal reasons, I want to invest some money in a fund focusing primarily on environment and sustainability. I’ve identified VFTAX, ESGV and VSGX so far, but I’m not entirely sure how to make a choice as I’m new to ESG investing, and I couldn’t find much information about these three funds.

I want to take a decision based on tax-efficiency (it’s for a taxable account and I’m in a high tax-bracket) and on the fund’s focus on environnement. I’d prefer to stick with Vanguard funds (especially a mutual fund), but I’m open to other suggestions if there are better alternatives that match my criteria.

I’d greatly appreciate your guidance!
https://money.usnews.com/investing/slid ... ds?slide=6

https://money.usnews.com/investing/slid ... ds?slide=9

any useful ideas there?

Investing in Low Carbon technologies is tricky. In any emergent field you are going to have winners & losers - how it will play out is not at all clear.

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