Sustainable investors can establish cost-effective diversified portfolios of funds that pursue an ESG Integration investing approach aligned with their financial profile and risk tolerance (1).
Summary
Sustainable investors seeking to establish a diversified investment fund portfolio that pursues an ESG Integration investing approach, as defined and based on the criteria set out below, should consider the SRA Select Listing. The SRA Select Listing consists of both ETFs and mutual funds, however, ETFs dominate the listing. Selected funds are monitored and updated on a quarterly basis. Impact or outcomes data will also be published on a periodic basis. Investment allocations will vary based on each investor’s goals and objectives, financial profile and risk preferences. Refer to SRA Investment Allocations for further details.
SRA Select Listing: ESG Integration Investment Funds
Notes of Explanation: AUM=Assets under management as of November 30, 2021. ER. Expense ratio. Performance results to November 30, 2021. ^ Impact report not available. # Effective March 1, 2022, the fund’s name and tracking index will change from the Bloomberg MSCI Global Green Bond Select (USD Hedged) Index to the Bloomberg MSCI USD Green Bond Select Index. The fund’s name will be iShares USD Green Bond EFT. Data sources: Morningstar Direct and Sustainable Research and Analysis.
Criteria for selection:
Funds are evaluated and selected based on the following criteria. Reliance on an ESG Integration strategy or thematic investment approach with an ESG orientation and independent reporting/disclosure practices are priority requirements for consideration. Some exceptions may apply.
- ESG Integration². Fund is either actively or passively managed (i.e., index fund). ESG Integration is an investment strategy by which environmental, social and governance factors and risks are systematically analyzed and, when these are deemed relevant and material to an entity’s performance, they will influence decisions on whether to buy or hold the relevant security and to what extent. Conversely, such considerations may lead to the liquidation of a security from the portfolio. ESG Integration is further subdivided into four categories based on the nature of and scope of ESG integration. Only funds that pursue a strategy consisting of ESG Integration, ESG Integration-Mixed and ESG Screening will meet the ESG Integration criteria for the SRA Select Listing. In addition, thematic funds with an ESG orientation are also considered.
- Reporting/disclosure. Fund should publish sustainable research reports, impact or outcomes reports or related information in another format on a periodic basis. Some exception may apply to optimize the other criteria.
- Low expense ratios. The average expense ratio levied by sustainable ETFs as of November 30, 2021, is 43 bps while ETFs in the first quartile charge 20 bps. The SRA Select Listing seeks to include funds that charge ≤ 20 basis points to the extent possible, but exceptions may apply. The average expense ratio charged by sustainable mutual funds is a higher 91 bps. The SRA Select Listing seeks to include mutual funds that charge ≤ 59 basis points to the extent possible, but some exceptions may apply.
- Operating history. Fund in operation for at least 3 years and managed by established management firm. Some exceptions may apply.
- Minimum fund net assets under management. ≥$50 million in net assets.
- Performance track record. Performance ≥ the relevant conventional index over the trailing 1-year and 3-years. Some exceptions may apply.
*Fund invests in U.S. Treasury obligations only. The US Government is generally scores highly based on ESG risks and opportunities.
**A note regarding money market fund options. The BlackRock LEAF Fund is a prime money market fund that invests in securities issued or guaranteed by entities that meet the fund’s ESG criteria as well as more rigorous environmental criteria. In addition, at least 5% of the net revenue from BlackRock’s management fee from the fund will be used to purchase and retire carbon credits. Moreover, BlackRock has committed to making an annual contribution to the World Wildlife Fund, an environmental non-profit organization focused on environmental protection. In the last year, BlackRock announced that it contributed in the amount of $185,000. At 45 bps, the fund’s expense ratio exceeds the level pursuant to the selection criteria outlined above. As an alternative, investors may choose a lower priced money market fund option that is invested in US government and/or US Treasury securities. Such lower cost options are available through some of the leading brokerage platforms, such as Fidelity, Vanguard or Schwab, to name just a few. For example, an SRA Select Listing portfolio can be established by opening a Vanguard commission free brokerage account. In that case, investors can choose to invest in the lower cost Vanguard Treasury Money Market Fund Investor shares (VUSXX) with a minimum investment of $3,000. The fund invests in U.S. Treasury securities and repurchase agreements, however, the fund does not publish sustainable research reports.
¹ Sustainable Research and Analysis (SR) Select Listing should not be construed to offer investment advice.
² ESG Integration Definitions
ESG Integration-The investment adviser assesses a company’s environmental, social and governance profile by conducting ESG research and leveraging engagement when appropriate through dialogue with company management teams as part of its fundamental due diligence process. The adviser views ESG characteristics as material to fundamentals and seeks to understand their impact on companies in which the fund may invest. Proactive proxy voting may also be employed.
ESG Integration-Mixed-The broadest form of ESG Integration. In addition to employing an ESG Integration approach as described above, the fund may also incorporate values-based screening as well as broader-based exclusions. Thematic elements may also apply. The investment adviser may also engage in active dialogues with company management teams to further inform investment decision-making and to foster best corporate governance practices using its fundamental and ESG analysis. Proactive proxy voting may also be employed.
ESG Screening-The fund employs a rules-based approach by which securities are mechanistically excluded based on various criteria such as severe controversies, values-based considerations, alignment with United Nations Global Compact principles in areas such as human rights, labor, the environment and anti-corruption, or the failure to achieve a minimum ESG score as determined by an ESG rating or scoring provider.
ESG Integration – Consideration-As part of the research process, portfolio management may consider financially material environmental, social and governance factors. Such factors, alongside other relevant factors, may be considered in the fund’s securities selection process.
Thematic- An investment approach with a focus on a particular idea or unifying concept linked to ESG. Clean energy, clean tech and gender diversity are a few of the leading sustainable investing fund themes. Investing in green bonds or low carbon emitting stocks, bonds and funds also fall into the thematic investing category.
