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4 Funds for Building a Sustainable Portfolio

Jon Hale, Ph.D., CFA
Alex Bryan, CFA

Jon Hale: Sustainable investing involves the use of environmental, social, and corporate governance, or ESG, criteria to evaluate investments or to assess their societal impact. It's not hard to build a portfolio of funds around sustainable investing because the approach is used across a variety of investment categories. For investors interested in building a sustainable portfolio, our analysts have identified several funds that would make great core holdings.

Alex Bryan: Vanguard FTSE Social Index is one of the cheapest and best diversified ESG funds around. It relies primarily on negative screens to filter out stocks with businesses tied to tobacco, alcohol, gambling, nuclear power, and adult entertainment. Stocks must also have a baseline level of diversity to be included in the portfolio. As a result of these exclusions, the fund does have certain sector tilts; it tends to underweight energy and industrial stocks and overweight technology and financial services stocks, which gives it a bit of a growth tilt. It still provides a pretty well diversified portfolio covering about 70% of its selection universe. It can allow some firms with mediocre ESG characteristics into the portfolio, but still does a pretty good job of avoiding the worst ESG offenders. Its low fee and broadly diversified portfolio should continue to serve investors well.

Brian Moriarty: Investors in the market for an ESG fund should consider TIAA-CREF Social Choice Bond. This is designed to form the core of a fixed-income portfolio, but it also employs a unique impact investing strategy. Going beyond traditional ESG screens, the fund looks for bonds that finance projects with defined and measurable impacts on ESG goals. This can introduce some liquidity risk into the portfolio, because many of these deals are small. The fund offsets this by holding a sizable stake in Treasuries. Thus far, the fund has shown that ESG investors don't have to give up return potential. Over the trailing five years, the fund's 2.7% annualized return has beat more than 90% of intermediate-term bond peers. Add in low fees, and this is the fund that investors should look into.

David Kathman: Amana Growth and Amana Income are a couple of funds that have historically been aimed at Muslim investors and followed Islamic investing principles, which means they don't own alcohol, tobacco, gambling, pornography stocks, or financials stocks because of the prohibition on paying or receiving interest. They have always had a fair amount of appeal to non-Muslim investors because of their solid track records and their tendency to own nice solid blue-chip companies that don't have a lot of debt and are very profitable. In recent years, the managers have started putting more emphasis on environmental, social, and governance principles that don't specifically have to do with Islamic law or Muslim investing principles, and these funds are still pretty solid funds that have a lot to offer to a lot of different investors.