Investors are increasingly expanding their attention beyond past performance to evaluate what the mutual funds and exchange-traded funds in their accounts are invested in.
Sensitivity to environmental sustainability, gender equity and many other social and corporate responsibility issues has been responsible for significant growth in investment funds that consider these factors in the stocks and bonds that they own.
Some points of evaluation are opaque, and not every ratings source grades similarly, but over the past few years, emerging resources have made it easier for investors to know what they own and seek out funds better aligned with their values and preferences.
At FossilFreeFunds.org, you can enter the ticker/trading symbol of the mutual fund or exchange-traded fund that you own or are evaluating. A report is generated identifying the number of fossil-free badges the fund earns.
The five-badge system evaluates the holdings of the fund for ownership of companies in five categories:
▪ The Carbon Underground 200 — the top 200 owners of coal and oil/gas reserves
▪ Coal industry miners and owners of coal reserves
▪ Oil/gas industry producers, refiners, pipeline operators and equipment companies
▪ Macroclimate 30 – the 30 largest coal-fired utilities
▪ Fossil-fired utilities – electric utilities powered by coal or natural gas
A five-badge fund has no exposure to any of these categories.
The report will show the total percentage of the fund that is invested in these categories broken down by segment and individual stocks owned.
For instance, Fidelity Contrafund, the largest actively managed mutual fund — as of its last reporting period April 29 — owned 19 stocks in these categories, totaling 7.8 percent of the fund’s assets.
By comparison, the S&P 500 Index of U.S. stocks is roughly 10.5 percent weighted in these fossil fuel categories.
Fidelity Contrafund earns one fossil-free badge.
Alternatively, if you’re looking to add fossil-fuel free funds to your portfolio, you can use the site’s search function to identify funds that earn all five badges as well as how they score in carbon footprint and other measures. You can also evaluate those funds’ past performance compared to indexes to determine the impact of the fund manager’s strategy.
Another topic gaining attention is gender equality.
At Genderequalityfunds.org, you can learn how funds you own compare to their peers in holding stocks or bonds of companies that have demonstrated gender balance on boards of directors and at the executive level. You also can review the gender pay gap and harassment reporting protections, among other factors.
In evaluating any particular mutual fund or exchange traded fund, the report shows the top 10 and bottom 10 holdings in the fund’s portfolio based on results from the Equileap Gender Scorecard.
Research from Morningstar shows that the percentage of women who serve on publicly traded company boards of directors has doubled from 10 percent of board spots in 2010 to 20 percent through 2017. The pace of growth has been slower among women in corporate executive leadership roles. Female executive staffing peaked in 2016 close to 16 percent.
Both the fossil free and gender equality sites are services of As You Sow, a nonprofit shareholder advocacy firm. Additionally, As You Sow offers tools to evaluate funds for exposure to tobacco, weapons and deforestation for palm oil.
Of course, these evaluations enter some murky territory. As with much of investing, there is substantial gray area between the indisputable black and white.
For instance, Berkshire Hathaway — the largest holding in Fidelity Contrafund — receives a poor rating in weapons and fossil fuel. Berkshire Hathaway is not wholly a weapons manufacturer or a dirty energy producer. It is a diverse conglomerate with holdings in many businesses, some of which fail the screens for these hot-button issues. Even though Berkshire Hathaway generates a small minority of its revenue from these industries, the whole company is essentially flagged as unsatisfactory to the sustainability audience.
There are several companies or agencies that provide ratings systems to evaluate sustainability and social responsibility. One that is easily accessible is Morningstar’s sustainability rating. It measures how well the holdings in a mutual fund or exchange-traded fund have performed on environmental, social and governance (ESG) issues relative to the fund’s peer group.
Morningstar’s evaluation uses data from Sustainalytics to assign ratings. A five-globe fund scores in the highest 10 percent of its peer group. A one-globe fund is in the lowest 10 percent, and a three-globe fund is average.
Some funds that don’t have a specific sustainability or ESG mandate will score well anyway under this rating system based on the companies that they own. Others that do market as sustainability-oriented may have lesser scores than expected.
If you care to know more about what you own, the answers might offer surprising results and help you make more informed decisions.