04/2020 KIPLINGER’S PERSONAL FINANCE 29products that essentially
harm or kill people, such
as cigarettes or weapons,
says Smith. The bond side
of the portfolio, about 35%
of assets, is filled with green
or sustainable bonds and
community-impact bonds
(see the box on page 26).
One holding, a Starbucks
IOU, pays to train farmers
in sustainable farming prac-
tices in places including
Colombia, Ethiopia and
Rwanda.
Investors haven’t had to
sacrifice returns to do good
with this fund. Over the
past one-, three-, five- and
10-year periods, Green Bal-
anced has outpaced two-
thirds or more of its peers
(funds that invest 50% to
70% of assets in stocks).
ARTISAN MID CAP (ARTMX,
1.19%) has an ESG focus,
according to investment
research firm Morningstar.
But the fund doesn’t sell
itself that way. It’s just man-
aged by nitty-gritty analysts
who pick good companies
that happen to give the
portfolio a greenish tint.
Four managers look for
midsize to large firms with
an innovative product or
service that fits an emerg-
ing customer need. That
tilts the fund toward busi-
nesses that are big on intel-
lectual property (think
medicine and software),
rather than businesses that
are dependent on natural
resources, which helps
to explain the fund’s high
E marks, says comanager
Matt Kamm. For example,
Atlassian, a “green tech”
firm and a top holding in
the fund, builds a cloud-
based software system that
helps business teams collab-
orate to create apps, among
other things. The fund’s
10-year annualized return,
14.8%, beats the S&P 500 by
an average of 0.8 percentage
point per year.
DODGE & COX STOCK (DODGX,
0.52%), a member of the
Kiplinger 25, the list of our
favorite no-load funds, is
another mutual fund that
doesn’t have to be labeled
green to be environmentally
friendly. Based on the good
environmental qualities of
the stocks it holds, the fund
earns an exceptionally high
E score from Morningstar,
compared with its peers.
The score puts the fund
among the top 5% of all
funds that invest in large
value-priced companies,
according to Morningstar.
Ten comanagers consider
ESG measures in each phase
of their investment research
and decision-making pro-
cesses. But rather than hav-
ing hard-and-fast rules,
they “assess ESG factors,
among many others, that
may be a key opportunity
or risk for a company,” says
Bryan Cameron, the firm’s
director of research. The
managers might, for exam-
ple, invest in a company that
has a significant ESG chal-
lenge if they believe the stock
is depressed as a result of
the issue and the company
is taking positive steps to
address it.
Value stocks have trailed
the broad market in recent
years. But Stock’s 10-year
annualized return of 12.5%
is impressive on an absolute
basis, even if it lags the S&P
500 by an average of 1.5 per-
centage points per year. QThe RatersWHO DECIDES
WHAT’S GREEN?
Before you can build a green portfolio, you must first identify a uni-
verse of environmentally friendly investments. There are principles
for green-bond issuers to follow, though doing so is voluntary. But
who decides which stocks are green? You (or your fund manager) will
have to rely on data from an environmental, social and governance
(ESG) ratings provider. And for investors looking to do good, minimize
risk and maximize returns, that’s where green can get a little muddy.ESG ratings. Some 70 firms provide some form of ESG stock ratings,
say researchers at investment firm Research Affiliates. Of the $30
trillion invested globally in investment strategies that incorporate
ESG data, the majority is in funds that use ratings from one of a hand-
ful of agencies, including MSCI, RobecoSAM (recently acquired by
financial research firm S&P Global) and Sustainalytics (partially
owned by Morningstar). But even among a small cohort of major
players, there isn’t much agreement. Researchers at the Massachu-
setts Institute of Technology compared the ratings from five agencies
and found an average correlation of just 61%. Ratings at the three
major bond credit-rating agencies, by contrast, are 99% correlated.
The assessments of the arbiters of green can diverge because of
differences in the factors deemed important, such as whether an
environmental score should include greenhouse gas emissions. Firms
may also assign varying levels of importance to the same criteria—so
greenhouse gas emissions may be 10% of one firm’s E score and 20%
of another’s. The biggest gaps come from raters using different met-
rics to assess the same attribute. For example, one rater might credit
a firm for rolling out plans to reduce emissions, while another may
tabulate total emissions along a company’s supply chain.Two sides of Facebook. To illustrate the difference in ratings,
Research Affiliates examined environmental ratings from two differ-
ent agencies for the same company: Facebook. One agency assigns
33% of its score to “Minimizing Environmental Impacts of Energy Use,”
a measure that roughly corresponds to the second rater’s “Carbon
Intensity,” which receives only a 3.3% weighting. As a result of this
discrepancy and others, one agency identifies Facebook as an envi-
ronmental leader while the other indicates that it’s below average.
You’re unlikely to find a granular breakdown of how a given ratings
provider scores companies, says Morningstar investor education di-
rector Karen Wallace. Your broker might have some details. Fidelity
customers, for example, can access MSCI reports that break down the
scoring between E, S and G and list recent company controversies.
Morningstar relies on data from Sustainalytics for the ESG scores,
carbon risk ratings and fossil fuel exposure statistics for mutual funds,
found on Morningstar.com. ESG ratings are a jumping-off point for
your own research, says Wallace. Delve into prospectuses or annual
reports (these days, many firms also publish sustainability reports)
to see if an investment aligns with your values. RYAN ERMEY
FOR QUESTIONS OR COMMENTS ABOUT THIS
STORY, E-MAIL [email protected].