A recent critique of sustainable investing on MarketWatch by Alicia Munnell offers a highly skewed analysis with conclusions that simply aren’t justified by the facts.
I am the chief executive of US SIF: The Forum for Sustainable and Responsible Investment, a membership organization with the objective of advancing sustainable investing. Sustainable investing does not exist to score political points. It is a dynamic investing discipline that considers environmental, social and corporate governance (ESG) criteria to generate long-term competitive financial returns and positive social impact.
In 2018, US SIF identified $12 trillion in U.S.-domiciled assets whose managers either review ESG issues as part of their investment analysis or portfolio selection or file shareholder resolutions on ESG issues at their portfolio companies’ annual meetings. This total is an increase of 38% since 2016.
Included in this sum are hundreds of mutual funds and dozens of exchange-traded funds (ETFs) in a range of asset classes spanning U.S. stocks, international equities and bonds. Sustainable investing now represents one in four dollars of the $46.6 trillion in U.S. assets under management.
There is no single motivation or approach to sustainable investing. In US SIF’s 2018 survey of US sustainable investing, we found that managers predominantly pursue a technique of “ESG integration”: the systematic and explicit consideration of ESG risks and opportunities within financial analysis.That approach may also be coupled with negative screening: excluding certain sectors or companies from a fund or plan based on specific ESG criteria.
Sustainable investment managers also communicate with the companies represented in their funds to encourage them to pursue commitments—from reducing greenhouse gas emissions to ensuring gender diversity on their boards and senior management—that will help them better compete over the long term.
Analyses and metastudies from such sources as Barclays, the University of Hamburg, Morgan Stanley, MSCI, Nuveen/TIAA and UBS indicate that sustainable investors do not have to pay more to avoid companies with poor ESG practices. Morgan Stanley’s review of sustainable mutual funds in existence for seven or more years found that “sustainable equity mutual funds had equal or higher median returns and equal or lower volatility than traditional funds for 64% of the periods examined.”
In other words, and contrary to Munnell’s argument, sustainable investment funds and approaches can be appropriate in public and private sector retirement plans.
The Labor Department agreed in 2015, saying that environmental, social, and governance issues can potentially influence risk and return of the investments in the plan. Therefore, the department said, it is appropriate for fiduciaries to consider these issues in selecting or monitoring investments.
The largest sustainable investing funds in operation 10 or more years
| Ticker | Fund | Fund Type | AUM ($ mil) | Benchmark Index |
| PRBLX, -0.35% | Parnassus Core Equity Fund | Equity Large Cap | $16,394 | S&P 500 Composite Total Return |
| TISCX, -0.30% | TIAA-CREF Social Choice Equity Institutional | Equity Specialty | $4,128 | Russell 3000 |
| PARWX, -0.32% | Parnassus Endeavor Fund | Equity Specialty | $3,833 | S&P 500 Composite Total Return |
| PARMX, +0.08% | Parnassus Mid Cap Fund | Equity Mid-Sm Cap | $3,433 | Russell Midcap Index |
| CEYIX, -0.38% | Calvert Equity Portfolio I | Equity Large Cap | $2,675 | S&P 500 Composite Total Return |
| CRANX, -0.19% | CRA Qualified Investment – Institutional | Bond (Fixed Inc) | $2,100 | Barclays Capital US Aggregate Bond |
| ARGFX, -0.14% | Ariel Fund | Equity Mid-Sm Cap | $2,090 | Russell 2500 Value |
| NBSLX, -0.03% | Neuberger Berman Socially Responsive I | Equity Large Cap | $1,837 | S&P 500 Composite Total Return |
| PAXIX, -0.12% | Pax Balanced Fund – Institutional Investor | Balanced | $1,748 | Blend: 60% S&P 500 – 40% BC Aggregate |
| CISIX, -0.23% | Calvert U.S. Large Cap Core Responsible Index Fund I | Equity Large Cap | $1,699 | Calvert U.S. Large Cap Core Responsible Index |
| CBDIX, -0.18% | Calvert Bond Portfolio I | Bond (Fixed Inc) | $1,515 | Barclays Capital US Aggregate Bond |
| CDSIX, -0.06% | Calvert Short Duration Income Fund I | Bond (Fixed Inc) | $1,475 | Barclays Credit 1-5 Yr |
| CAAPX, -0.02% | Ariel Appreciation Fund | Equity Mid-Sm Cap | $1,281 | Russell Mid Cap Value |
| DOMIX, +0.00% | Domini International Social Equity Fund — Investor shares | Int’l Global | $1,189 | MSCI EAFE Equity |
| CULAX, +0.00% | Calvert Ultra-Short Income Fund A | Bond (Fixed Inc) | $957 | Barclays Short Treasury 9-12 Mon |
| PARNX, -0.12% | Parnassus Fund | All Cap | $908 | S&P 500 Composite Total Return |
| PGINX, -0.25% | Pax Global Environmental Markets Fund – Institutional Class | Int’l Global | $757 | MSCI AC World (Net) Index (ACWI) |
| CBAIX, -0.20% | Calvert Balanced Portfolio I | Balanced | $753 | Russell 1000 |
| DIEQX, -0.40% | Domini Social Equity Fund — Institutional shares | Equity Large Cap | $720 | S&P 500 Composite Total Return |
| ACCSX, +0.00% | Access Capital Community Investment Fund I | Bond (Fixed Inc) | $585 | Barclays Capital US Securitized Bond |
| PXNIX, -0.46% | Pax MSCI EAFE ESG Leaders Index Fund – Institutional Class | Int’l Global | $566 | MSCI EAFE ESG Index |
| MIIIX, -0.10% | Praxis Intermediate Income – Institutional | Bond (Fixed Inc) | $542 | Barclays Capital US Aggregate |
| PORTX, -0.31% | Portfolio 21 Global Equity Fund | Int’l Global | $523 | MSCI ACWI |
| CSVIX, +0.04% | Calvert Small Cap Fund I | Equity Mid-Sm Cap | $507 | Russell 2000 Value |
Source: US SIF: The Forum for Sustainable and Responsible Investment. All performance data is as of May 31.
In her column, Munnell dismisses as “anecdotal” the preponderance of substantive evidence that sustainable investing does not produce worse results for investors. Meanwhile, the research she does cite, a 2019 study by Wayne Winegarden of the Pacific Research Institute, a California think tank that describes itself as “advancing free-market policy solutions,” has significant weaknesses.
The crux of Winegarden’s paper and Munnell’s argument is that a small group of ESG funds underperformed the S&P 500 index SPX, -0.34% a benchmark of large-cap U.S. companies. However, only six of the 18 funds in his sample of sustainable investing funds with a track record of 10 years or more are U.S. large-cap funds. Of the remainder, nine are sector-specific funds that focus on clean tech and renewable energy companies of various capitalization sizes, two invest in non-U.S. equities, and one is a U.S. midcap fund. In other words, for the majority of the funds in his sample, the S&P 500 is simply not an appropriate benchmark.
Comparing a midcap broad-based fund to the S&P 500 is a mistake; the S&P MID, +0.02% or Russell RUT, +0.01% midcap indexes are much more appropriate benchmarks. There also exist specialized indices that can more appropriately be compared to international funds and more focused funds such as clean tech.
It is strange that Winegarden could only find such a limited and oddly skewed sample of ESG funds with a performance track record of 10 years or longer. US SIF hosts a Sustainable, Responsible and Impact Mutual Fund and ETF Chart that includes 115 funds with a performance record of 10+ years. This veteran group includes U.S. large-cap, midcap and small-cap funds, international equity funds, fixed income funds and balanced funds (both equity and fixed income); many of these funds are available to retail investors. Our list consists only of funds offered by our members, so the total count of sustainable mutual funds and ETFs would be even greater.
This table of the 24 largest funds, first listed above, shows their performance data over three, five and 10 years and their expense ratios.
| Fund | 1-year Avg % | 3-year Avg % | 5-year Avg % | 10-year Avg % | Expense Ratio % |
| Parnassus Core Equity Fund | 10.84 | 11.62 | 9.12 | 13.59 | 0.87 |
| TIAA-CREF Social Choice Equity Institutional | 2.48 | 11.27 | 8.28 | 13.32 | 0.17 |
| Parnassus Endeavor Fund | -3.08 | 9.87 | 9.71 | 14.49 | 0.92 |
| Parnassus Mid Cap Fund | 7.75 | 9.62 | 8.62 | 13.93 | 0.99 |
| Calvert Equity Portfolio I | 19.11 | 16.6 | 12.82 | 15.07 | 0.71 |
| CRA Qualified Investment – Institutional | 5.06 | 1.83 | 2.39 | 3.06 | 0.46 |
| Ariel Fund | -5.50 | 7.72 | 6.29 | 14.31 | 1.00 |
| Neuberger Berman Socially Responsive I | -1.50 | 8.97 | 7.49 | 12.4 | 0.67 |
| Pax Balanced Fund – Institutional Investor | 3.27 | 6.65 | 5.36 | 8.27 | 0.66 |
| Calvert U.S. Large Cap Core Responsible Index Fund I | 4.88 | 11.75 | 9.87 | 14.30 | 0.19 |
| Calvert Bond Portfolio I | 6.27 | 3.46 | 3.21 | 4.78 | 0.53 |
| Calvert Short Duration Income Fund I | 4.52 | 2.79 | 2.20 | 3.26 | 0.52 |
| Ariel Appreciation Fund | -5.08 | 5.33 | 4.39 | 13.18 | 1.12 |
| Domini International Social Equity Fund — Investor shares | -9.44 | 3.64 | 2.02 | 7.00 | 1.46 |
| Calvert Ultra-Short Income Fund A | 2.44 | 1.74 | 1.25 | 1.66 | 0.77 |
| Parnassus Fund | 6.25 | 10.07 | 8.00 | 13.76 | 0.84 |
| Pax Global Environmental Markets Fund – Institutional Class | -1.00 | 8.43 | 4.99 | 9.42 | 1.04 |
| Calvert Balanced Portfolio I | 7.76 | 8.29 | 6.28 | 9.66 | 0.62 |
| Domini Social Equity Fund – Institutional shares | 1.15 | 8.66 | 5.60 | 11.67 | 0.79 |
| Access Capital Community Investment Fund I | 4.80 | 1.49 | 1.86 | 2.69 | 0.65 |
| Pax MSCI EAFE ESG Leaders Index Fund – Institutional Class | -4.67 | 4.59 | 0.43 | 3.44 | 0.55 |
| Praxis Intermediate Income – Institutional | 6.26 | 2.58 | 2.66 | 4.07 | 0.54 |
| Portfolio 21 Global Equity Fund | 0.97 | 9.85 | 6.58 | 8.92 | 1.33 |
| Calvert Small Cap Fund I | 0.86 | 12.45 | 9.47 | 13.87 | 0.91 |
Source: US SIF: The Forum for Sustainable and Responsible Investment. All performance data is as of May 31.
Munnell and Winegarden further state that ESG funds have higher expense ratios than an S&P 500 index fund. Again, this is an apples-to-oranges comparison. The expense ratios of any actively managed ESG funds should be compared with those of actively managed conventional funds within the same asset class and with the most appropriate index fund for that class. Comparing the expense ratio of an international, emerging market or U.S. midcap fund to that of an S&P 500 index fund is irrelevant to the investor who is seeking a balanced portfolio that is not invested solely in large-cap US equities.
A more nuanced assessment of fund performance and expense ratios is offered by Morningstar, which compares funds — sustainable and conventional alike — with their peers by asset class and style. Of the 24 largest US SIF member funds with a track records of 10 years or more, Morningstar rates 14 as in the top 35% for performance over time (a 4-star or 5-star rating), and nine in the next 35% (3-stars). With regard to expense ratios, Morningstar says that 10 of these funds have average expense ratios relative to their peers, and seven have low or below-average fees.
Sustainable investors who seek lower fund expense ratios can also take advantage of a growing number of sustainable index funds and ETFs that have been introduced to the market in the last few years. The number of ETFs pursuing sustainable investing approaches grew from just 25 in 2016 to 69 in 2018, according to US SIF’s survey data.
We welcome debate on sustainable investing, but the assertions made by Munnell and Winegarden don’t stand up to rigorous scrutiny. There is ample and growing evidence that ESG products achieve comparable or even better financial returns than conventional investments.
Lisa Woll is the CEO of US SIF: The Forum for Sustainable and Responsible Investment, an industry group advocating for sustainable, responsible and impact investing across all asset classes.
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