Sometimes, when two companies like each other very much, they get the urge to merge. And lately, romance has been blossoming among companies dedicated to environmental, social and governance issues. And the interest is not just coming from millennials.
The latest ESG activity occurred Tuesday, when FOLIOfn, Inc., bought First Affirmative Financial Network, a registered investment advisor specializing in Sustainable, Responsible, Impact investing. (SRI investing involves screening out companies, such as tobacco and firearms producers. ESG doesn't necessarily screen out companies for social criteria, but takes note of them in an overall evaluation).
Last month, Eaton Vance signed a definitive agreement
to buy the $12.3 billion Calvert funds, one of the oldest SRI firms. “As part of Eaton Vance, we see tremendous potential for Calvert to extend its leadership position among responsible investment managers,” said Thomas E. Faust Jr., Eaton Vance's CEO.
Eaton Vance isn't the only company that thinks ESG is more than a balm for investors' conscience.
Goldman Sachs purchased Imprint Capital, an ESG asset manager with more than $550 million of assets under management, in 2015.
All told, SRI assets grew to more than $6 trillion in 2014, the latest data available and U.S. SIF, which tracks social investment, says assets are continuing to grow.
And, of course, where there's an area of interest in the investment world, the exchange-traded fund industry tries to capitalize on that interest. State Street rolled out the SPDR SSGA Gender Diversity ETF (SHE) in March, for example, and the FlexShares STOXX US ESG Impact ETF (ESG) made its debut in July.
“I think that as younger investors become more socially conscious, firms are increasingly looking to launch new products,” said Todd Rosenbluth, director of ETF and mutual fund research in the U.S. for S&P Global Market Intelligence.
But it's not just millennials who are interested in ESG. After all, it's the baby boomers, their parents, who have the most to invest.
“All investors are beginning to see that considering the people and the planet is good business,” said Carole Laible, CEO of
Domini Investments. “If they can earn a competitive return, why not add value to society as well? It's a win-win situation that investors across all age ranges are looking at.”
The newer funds in the ESG arena also reflect the broad movement from active to passive management. “It's hard to justify the higher fees for ESG funds, and there's nothing stopping more passive, rules-based products,” Mr. Rosenbluth said.
At least until this year, some ESG funds had a performance bonus as well. Parnassus Endeavor Investor (PARWX), for example, has gained an average 17.73% a year the past five years. Vanguard FTSE Social Index (VFTSX) is up 14.8% a year the same period.
Both funds have an advantage common to many ESG funds: They're relatively light on energy, because it's hard to find environmentally sensitive companies in the energy sector that make money. Neither Parnassus Endeavor nor its sibling, Parnassus (PARNX), for example, have any energy holdings, according to Morningstar. Vanguard's offering has just 3.2% of its assets in energy, versus about 7% for the Standard and Poor's 500 stock index.
But if you're an adviser, you shouldn't use performance alone as a criterion for choosing a fund. Numerous studies have shown that ESG doesn't particularly help or hurt long-term investment performance. And an ESG fund is probably a bad place to make an energy bet, even if divestment from fossil fuels is a growing trend.
“More and more investors are calling for a portfolio that's moving away from fossil fuel producers,” Ms. Laible said.
And that's where due diligence makes a difference. Some funds that are listed as ESG funds have relatively limited screens. The Ariel funds, for instance, are listed as socially conscious funds because they don't invest in tobacco stocks. Others, such as the Timothy Plan, takes a mainstream Christian approach to investing.
And ESG rules tend to evolve. “We've never invested in coal,” Ms. Laible said.
But the Domini funds did invest in some small refineries in the 1990s. “Through the years, one by one, they fell off,” she said. So if you do have clients who want to join the growing ESG movement, make sure you let them know that their fund's standards could change with times — just as they do.
