A survey of current SRI (ESG) index and passive asset class funds.
Over the past decade, socially responsible investing (SRI) has emerged from a relatively niche corner of the investment landscape into the mainstream. According to the Social Investment Forum, SRI has been expanding at a much faster pace than the broader universe of all investment assets under professional management; as of 2007, almost one out of every nine dollars under professional management in the
Indeed, the term “SRI” itself has become somewhat passe, surpassed by the acronym “ESG,” standing for environment, sustainability and governance screens. The change reflects the broader adoption of these principles by the mainstream institutional investment community.
Fortunately for those adhering to index/passive asset class investment strategies, there is a growing roster of cost- and tax-efficient ESG vehicles, although some notable gaps still remain within the asset allocation palette. Investors should recognize that ESG screens result in somewhat higher fund expenses than nonscreen alternatives. That said, with the advent of new index and passive asset class alternatives, it is getting easier to build well-diversified ESG portfolios at reasonable costs.
This article examines the current, broad-based secular ESG funds available to investors. There are other, narrower ESG-related index vehicles, focusing on specific niches such as clean energy—as well as other funds incorporating religious-based screens.
The focus of this survey is ultimately from the standpoint of ESG as an “overlay” component, building upon the fundamental investment principles of global asset class diversification, frictional cost minimization and tax efficiency. In other words, it assumes ESG is not a separate asset class, but a means of investing in existing, traditional asset classes.
One of the main takeaways is that there is no “one size fits all” solution. Investors—and their advisers—need to closely examine the alternatives, and understand the various screening parameters and any resulting sector biases (and consequent potential risks), as well as the usual considerations such as expenses.
Original ESG Index Funds
First, let’s take a look at two of the original ESG index funds, launched by two ESG-focused fund companies:
The Domini Social Equity Fund (DSEFX), established in 1991, originally tracked the first and perhaps most well-known ESG index in the
Concurrent with this change, the fund increased its expense ratio from 0.95 percent to the current gross expense ratio of 1.31 percent.
There remain two alternatives for those who desire to invest in the original index (which, it bears mentioning, has been re-branded as the FTSE KLD 400 Social Index, due to a new partnership between FTSE Group and KLD Research & Analytics, a leading SRI research firm and the creator of the original Domini 400):
- Green Century Equity Fund (ticker: GCEQX): This open-end, no-load mutual fund carries an annual expense ratio of 0.95 percent, the same as the original DSEFX prior to its conversion to an active fund. Since its inception in 1995, the mandate of GCEQX has been to track the FTSE KLD 400 Social Index.
- iShares FTSE KLD Social 400 (NYSEArca: DSI): This exchange-traded fund launched around the same time DSEFX transitioned to active strategy. It sports an even lower 0.50 percent annual expense ratio.
It is interesting to note that since DSEFX turned active three years ago, it has slightly lagged the above two passive alternatives. Although over a still relatively short measurement period, the actively managed DSEFX has posted a three-year annualized return of -5.58 percent, vs. -4.87 percent for DSI and -5.26 percent for GCEQX as of Nov. 30, 2009.