2 things to beware of while investing in ESG funds Smart Change: Personal Finance

(Xavier Simon)

If you want to invest in companies that share your values, consider environmental, social and governance (ESG) funds. They aim to invest in companies that are holistically environmentally friendly, socially responsible and ethically governed. It Sounds Great – But Before You Jump In Investing in ESG FundYou will face some major risks.

Not all ESGs are the same

Some companies may not live up to their stated ESG principles. An analysis by climate-change think tank InfluenceMap found that 71% of ESG equity funds invest in companies that align with the Paris Agreement, a legally binding UN treaty Which calls on countries to reduce greenhouse gas emissions.

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But that doesn’t mean there aren’t some gems in the mix. The Influence Map study found that the funds analyzed had Portfolio Paris Alignment scores ranging from -42% to +90%.

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ESG funds can also fail to really align with your values. Some highly rated ESG funds may invest in fossil fuel companies. Others may have strong environmental records in component stocks, but lack adequate safety policies for their employees.

You need to examine ESG funds to make sure they hold companies that reflect your principles. Here are some sources you can use to evaluate ESG funds and the companies they track:

  • MSCI ESG Rating and Climate Search Tool And this Sustainlytics Company ESG Risk Rating ToolThere is no universally recognized ESG rating criteria, but these are the two most popular ESG rating tools. You can use these to view companies and check their ESG track records.
  • ethical consumer: Founded in 1989, this organization provides free sustainability reports covering more than 40,000 companies, highlighting controversial or environmentally hazardous business practices.
  • sec edgari Website: Here, you can search for filing type DEF 14A to access proxy statements for various companies. The SEC requires companies to file these documents, which present key points for discussion at special stockholder meetings. These can give you a glimpse of changes in the board of directors, salary of directors and other governance related information.
  • Company Websites: Explore press releases and investor relations pages to see if companies can back their ESG claims with solid evidence.
  • Fund prospectus: Apart from providing vital information about the fund’s holdings and past performance, you can also use this document to obtain information about the fund’s objectives and its management team.

But even if you can prove that the ESG fund or company is really in line with your values, you can’t forget the fundamentals.

Green Funds Don’t Always Make Green

Sure, it’s nice to support a company that is doing everything possible to protect our planet and its people. But if you are investing in these companies, you want to make sure that they deliver consistent returns. The ability of ESG funds to do this is not always clear.

a morning Star (NASDAQ:MORN) The report found that as of June 2022, 65% of permanent US equity funds were at the bottom of their Morningstar category rankings for year-over-year performance. But this trend may not be directly influenced by the concept of ESG. According to a Morningstar report, many ESG funds are heavily weighted in tech stocks, which have faced some downside this year. Nevertheless, ESG funds may present a better long-term picture. The same report noted that over the long run, 53% of US equity ESG funds made it to the top half of their category.

Overall, you need to carefully engage in your own due diligence while selecting an ESG fund. Make sure the companies they invest in truly reflect your values ​​and have the fundamentals to back up reliable performance expectations. For example, you can view a fund’s prospectus online to check its returns over the years.

And if you’re not satisfied with these funds, you can always create your own ESG-powered portfolio Choosing ESG Shares Companies that you consider respected in this space.

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Fool contributor Xavier Simon holds no financial position in any of the companies mentioned. The Motley Fool does not hold any positions in any of the stocks mentioned. The Motley Fool has one Disclosure Policy,

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