Rapid climate change, rise in global warming and the raging pandemic has forced investors to reassess the scope of physical risks that impact financial markets. In the past decade, effects of climate change have gradually permeated through daily lives and there is an urgent need to take steps toward conserving the environment. In short, it’s time to look toward a sustainable future.
While governments and businesses do their part in conserving nature and adopting sustainable practices, investors also need to show a sense of accountability. How? Investors should focus more on being responsible by putting their wealth into sustainable businesses. When we talk about responsible or sustainable investing, it is an umbrella that covers impact investing, socially-responsible investing, environmental, social and governance (ESG) integration, and climate investing.
Let’s talk about each of the above category in brief. Impact investing focuses on generating measurable social or/and environmental benefits. Next, we have socially-responsible investing that falls in line with investors’ ethical values and reduces the negative impact on environment and society. ESG integration considers ESG factors to enhance long-term returns and risk management. Lastly, climate investing, as the term suggests, focuses on ways to reduce climatic risk, looking for low-carbon investment with net-zero emission targets.
Sustainable funds have proven to be capable of surviving market gyrations, especially during lows and high volatility. According to a Morningstar report, U.S. sustainable funds witnessed $21.5 billion in net inflows in the first quarter of 2021, which is higher than the previous record and all-time high of $20.5 billion achieved in the fourth quarter of 2020. In fact, sustainable funds witnessed a net flow of $51 billion, which is more than double the total for 2019 ($21.4 billion) and a ten-fold growth from 2018’s $5.4 billion.
So far, most of the global sustainable investment is concentrated in Europe. And records state that nearly 82% of the global market or $1.6 trillion is invested in sustainable funds in the country. Meanwhile, America is the second-largest market with a total value of $270 billion worth of sustainable investment or 13% of the global market.
The prospects of sustainable investing are expanding as millennials who hold the reputation of being socially aware and have a value-driven approach will witness around a $30-trillion intergenerational wealth transfer from baby boomers. Hence, this cohort will drive the change toward investing in sustainable future.
3 Sustainable Fund Picks
Given the positive scenario, we shortlisted three ESG-focused mutual funds. All these funds carry a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy). In addition, the minimum initial investment for these funds is within $5,000.
We expect these funds to outperform peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance but also on the likely future success of the fund.
The question here is why should investors consider mutual funds? Reduced transaction costs and diversification of portfolio without several commission charges that are associated with stock purchases are primarily why one should be parking money in mutual funds (read more: Mutual Funds: Advantages, Disadvantages, and How They Make Investors Money).
New Alternatives Fund Class A NALFX seeks long-term capital growth with income as its secondary objective. It primarily invests in common stocks of companies and even in other equity securities such as real estate investment trusts and American Depository Receipts.
This Zacks sector – Other product has a history of positive total returns for more than 10 years. Specifically, NALFX has a three and five-year returns of 29.4% and 20.8%, respectively. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.
NALFX carries a Zacks Mutual Fund Rank #1 and has an annual expense ratio of 0.96% compared to the category average of 1.26%.
Calvert Equity Fund Class A CSIEX aims for growth of capital through investment in stocks believed to offer opportunities for potential capital appreciation. The fund invests majority of assets in common stocks of companies that rank among the top 1,000 U.S.-listed companies.
This Zacks Large Cap Growth product has a history of positive total returns for more than 10 years. Specifically, CSIEX has a three and five-year returns of 23 % and 19.7%, respectively. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.
CSIEX carries a Zacks Mutual Fund Rank #2 and has an annual expense ratio of 1.24% compared to the category average of 1.26%.
Parnassus Mid Cap Growth Fund – Investor PARNX aims for capital appreciation. The fund invests majority of assets in mid-sized growth companies.
This Zacks Sector – Large Cap Value has a history of positive total returns for more than 10 years. Specifically, PARNX has returned 17.5% and 15.3% for the three and five-year periods, respectively. To see how this fund performed compared to its category, and other 1 and 2 Ranked Mutual Funds, please click here.
PARNX carries a Zacks Mutual Fund Rank #2 and has an annual expense ratio of 0.83%, which is below the category average of 1.09%.
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