Does Your Fund Reflect Your Personal Values?

Good news for those who are beginning to invest their personal values: It’s easier than ever to see if your mutual fund or exchange-traded fund reflects them.

For example, in the aftermath of mass shootings, you may be interested in ridding your portfolio of guns. Chances are you do have some exposure to guns in your fund portfolios, even if for most investors, the exposure is almost sure to be minimal. Screening out unwanted stocks is a long-standing cornerstone of socially responsible investing and impact investing. Today, If you check a fund’s quote page on Morningstar.com, you’ll be able to find out which of 15 different controversial practices that your fund may be involved in.

Consider SPDR S&P 500 ETF Trust SPY, a $360 billion proxy for the market. Click on the Sustainability tab on SPY’s Morningstar.com page, and then click on Product Involvement. You’ll see that 1.04% of the fund’s assets are in companies with exposure to small arms, double the 0.50% for the large-blend Morningstar Category as a whole.

Looking at Controversial Practices

On the same page, you’ll also find SPY’s involvement in 14 other controversial practices, from animal testing to gambling. The product involvement metric measures the percentage of a fund’s assets that are exposed to a variety of different business activities. Morningstar calculates the data by adding the portfolio holdings of the companies involved in each area. The companies are considered to be involved if their revenue exposed to that area is at a minimum investment threshold. (You can find the full list of minimum involvement thresholds here.) The data are updated regularly.

The solid section of each colored bar shows the percentage for each fund. The lined portion of the bar shows the percentage for the fund’s category. If you want the data depicted as a table, click on the table icon to the upper right.

You’ll see, for example, that 1.94% of SPY’s assets are exposed to companies involved with controversial weapons such as biological or nuclear weapons, versus 2.75% for the category. Meanwhile, the fund has 1.52% exposed to thermal coal, less than the 3.42% of the category.

A Note About Animal Testing

One important note: You’ll notice that SPY and many funds have a high exposure to animal testing—SPY is at 21.6%, versus 17.1% of the category. That’s because any holding that does animal testing, say a drug company, regardless of the percentage of revenue involved, counts in Morningstar’s methodology. By contrast, the fund has 0.2% in alcohol, versus 0.5% for the category. Under Morningstar’s methodology, a company is considered exposed to alcohol if it derives at least 5% of revenue from manufacturing it, 50% to 100% of revenues from supplying it, or 25.0% to 49.9% of revenue from distributing it.

If you want to look at a sustainable fund, many of which use screens for controversial stocks, let’s look at Parnassus Core Equity PRBLX, one of the largest actively managed sustainable funds with $26 billion in assets. Parnassus funds don’t invest in companies that derive 10% or more of revenue from manufacturing alcohol or tobacco products or are directly involved with gambling. They don’t invest in companies that derive 10% or more of revenue from fossil fuel extraction. Parnassus Core Equity has zero percent in nuclear energy, controversial weapons, military contracting, and guns. Parnassus funds invest in companies with positive performance on environmental, social, and governance criteria.

Look Closely at How Involvement Is Defined

To be sure, some of these definitions can be up for debate, so look closely at how involvement is defined. Consider a more conventional sustainable fund—iShares ESG Aware MSCI USA ETF ESGU. This $22 billion fund tracks the MSCI USA Extended ESG Focus Index, which “strikes a balance between ESG integration and market representation,” writes Morningstar associate analyst Lan Anh Tran. It filters out companies involved in controversial business lines or severe controversies, then leans toward companies with high ESG scores while aiming to reduce tracking error against the MSCI USA Index. As a matter of policy, ESGU screens for civilian firearms, controversial weapons, tobacco, thermal coal, and oil sands.

By Morningstar’s reckoning, ESGU has zero percent in thermal coal and tobacco. But according to the same analysis, the fund has 1.3% exposure to small arms, versus 0.5% for the large-blend category. What gives? One clue may lie in differing definitions: Morningstar counts companies that sell guns to military and law enforcement as well as civilians. ESGU focuses on civilian firearms.

Such tools will grow more important as more investors, particularly individuals, direct assets based on their values, and as investors reconsider investing in sectors they once shunned. For example, because of the war in Ukraine, some sustainable investors have reconsidered investing in weapons and defense stocks. One product involvement category much in the news recently, for example, is what Morningstar calls “life ethics.” It covers companies with exposure to abortion, contraceptives, and stem cell research. The percentage appears high for funds because, as with animal testing, any company involved, no matter how minutely, is considered to be exposed.

Screening, divestment, and engagement, are all part of the sustainable investor’s toolkit. There’s room for all in a sustainable portfolio.