Q: I am deeply concerned about climate change and would like to divest from fossil fuels and other carbon polluting companies. ... Is there something out there like an S&P 500 index fund (or ETF) — stripped of the major polluters? If not, do you have any other suggestions that would maintain diversification and still have low fees?
Kathy
A: Yours is among the most important questions in personal finance: How can investors make a difference with their investments when it comes to addressing climate change?
How can they know that their money is rewarding companies with a genuine stake in a more sustainable future? And, at the same time, how can we follow the sensible investment strategy for long-term investors of putting their money into low-fee broad-based index funds?
Sustainable investing is mainstream, mostly using the Environmental, Social and Governance funds (ESG) metrics. That said, ESG investment strategies diverge greatly.
For example, some funds focus mostly on negative screens, making sure the portfolio doesn't hold any of the worst ESG companies. Other funds prefer investing in companies with high ESG scores. Sustainable investing is an evolving approach since standards, data and measurements vary.
"One concern people may have is the lack of transparency on how environmental performance is evaluated," says Shirley Lu, assistant professor at Harvard Business School. Like you, I prefer low-fee broad-based socially conscious index funds over actively managed portfolios. The more narrowly focused index funds tend to come with higher fees and are more volatile.
One well-known broad-based option is the Vanguard ESG U.S. Stock ETF. The fund focuses on excluding certain companies and industries, like fossil fuels, firearms and tobacco. A fund with a more proactive stance is the iShares Edge MSCI USA Leaders ETF.
These recommendations come from an interview on the investment platform Morningstar with Alex Bryan, the company's director of passive strategies research for North America. Bryan also co-authored the white paper, "Passive Sustainable Funds: The Global Landscape." Morningstar is a good research resource on sustainable investing options.
The US SIF Foundation has released its sustainable investing guide: "Getting Started in Sustainable Investing: A Guide for Individual Investors."
The guide is available at it website and it offers links for additional research into mutual funds and ETFs, direct ownership of stocks, community-oriented cash and fixed income products.
Chris Farrell is senior economics contributor for "Marketplace" and economics commentator for Minnesota Public Radio.