• Skip to main content
  • Skip to primary sidebar
  • Skip to footer
MENUMENU
  • Home
  • About Us
    • Our Philosophy
    • Choosing a Financial Planner
    • Legal and Regulatory
    • Team
    • Careers
    • Awards & Recognition
    • Contact Us
  • Our Services
    • Financial Planning
    • Ongoing Financial Guidance
    • Portfolio Management
  • Financial Planning Basics
    • Continuing Care Retirement Communities (CCRCs)
    • Retirement Planning and Cash Flow
    • Social Security
    • Taxes
    • Insurance & Risk Management
    • Investments
    • 401(k)
    • Real Estate
    • College
    • Liquidity
    • Divorce
    • Estate Planning
    • Sensible Updates
  • Resources
    • Blog
    • Financial Planning for Older Adults
    • Webinars
    • Videos
    • Financial Planning Guidebook
    • Continuing Care Retirement Communities Guidebook
    • Primers
    • Financial Planning Links
    • Client Login
  • Contact Us
Sensible Financial Planning

Sensible Financial Planning

Follow Us

  • Facebook
  • LinkedIn
  • Twitter
Client Login

Call Us Today
781-642-0890

Sustainable Investments: A Sensible Approach

by
Rick Miller
Ph.D., CFP® - Founder

January 17, 2018

Edward Samp contributed extensively to this article.

Many investors have become interested in the impact of their investment decisions on the world in which we live. While the primary objective of your investment strategy may be financial: e.g., allowing you to live comfortably in retirement or putting your children through college, some investors also desire portfolios that directly express other values. Sustainable investing serves this purpose.

Unlike mutual funds that track standard indexes, which are quite similar to one another, sustainable funds have a wide variety of investment policies. Areas of focus can include minimizing the carbon footprint, social responsibility, restriction of certain industries,[1] human rights, and labor relations. Below are some examples.

sustainable investments

Some funds share common elements, but there is no consensus on “sustainability.” Some funds invest in companies with a positive impact in certain areas. Others seek to minimize or entirely exclude companies perceived as having a negative impact. Careful review is required to ensure that you know what you are getting.

Sustainable funds differ from Sensible model holdings in three primary ways (aside from sustainability measures):

  1. Most sustainable funds are actively managed, while Sensible model holdings are passively managed. Largely as a result, sustainable funds are more expensive, resulting in lower long-term expected returns.
  2. Most sustainable funds are small, with less than $1B in assets. With lower liquidity, the cost to move in and out of these funds is higher. If funds remain small and operate at a loss or at low profitability, they may be discontinued.
  3. Sustainable funds will likely cause greater tracking error and volatility in your portfolio. Underlying companies are typically smaller and more growth[2] In addition, entire industries are often excluded, somewhat reducing diversification.

Based on conversations with some of our clients interested in sustainable funds, we decided to focus on environmental impact in researching funds. Our research relied heavily on two resources:

  • US Forum for Sustainable and Responsible Investment (http://charts.ussif.org) identifies and evaluates socially responsible and sustainable mutual funds on numerous factors including climate/clean tech, pollution/toxins, & environmental.
    • This source holds itself out as being exhaustive. It is very thorough and is updated quarterly.
  • https://fossilfreefunds.org/ rates numerous funds and ETFs on their exposure to fossil-fuel related companies.
    • Carbon Underground 200: 100 coal companies and 100 oil/gas companies with most emissions
    • Macroclimate® 50 Coal-Fired Utilities: largest 50 utility companies using coal-fired power plants
    • Entire industry sectors: Coal, Oil & Gas, Fossil-Fueled Utilities

In our research, we found that US and international equity have the most robust offerings of sustainable funds. To match these funds as best we can with our Sensible models, we considered only large company stock funds without significant value or growth bias. We segregated our findings into two types of sustainable funds:

  1.  “Sustainable Weighted” funds are more closely aligned with Sensible Financial’s investment philosophy of passive management. This approach has a downside of not scoring quite as well on the fossil-free scale.
  2.  “Strict Sustainability” funds aim to have little or no exposure to fossil-fuel related companies. These actively managed funds are more expensive, meaning lower long-term expected returns.

The table below compares sampled sustainable funds to Sensible Financial’s preferred holdings in our standard model. It illustrates the trade-off between cost and environmental impact. For international equity, no funds score perfectly in environmental impact according to fossilfreefunds.org.

The performance of these funds varies greatly[3]. Each sustainable fund may have a different area of focus dictated by its investment policies, leading to differences in industry exposures and the types of companies in which it invests. The table below illustrates a wide range in returns.

Each of the funds above may follow a different benchmark – often a custom benchmark created by the fund company. Because these benchmarks may (and usually) differ greatly from the benchmarks we use for our Sensible models, this can lead to greater tracking error in your portfolios. In some years, you might enjoy better returns; in other years, returns might be worse. Greater variability in performance reduces confidence in your financial well-being.

Research from numerous studies points to overwhelming empirical evidence that funds with lower expense ratios (passively invested funds) generate greater long-term returns. As a firm, we do not recommend actively managed portfolios. Because of this, we have decided to recommend the Sustainability Weighted approach – it is better aligned with our investment philosophy. The table below summarizes our sustainable recommendations.

We are pleased to offer this sustainable investing approach to our clients. It is important to be clear that that sustainable investing is somewhat more expensive. If you are interested in exploring sustainable investments further, please contact your advisor.

 


[1] Alcohol, gambling, tobacco, and weapons industries are often excluded.
[2] Sensible Financial portfolios usually “tilt” towards value stocks and away from growth stocks in anticipation of slightly higher and less volatile returns.
[3] Trailing returns as of 12/31/17

 

Rick Miller is the founder of Sensible Financial Planning and Management. To ask Rick or another member of our team about planning for your financial future, please get in touch!

More articles by Rick Miller Filed Under: Investments Tagged With: Investment Strategy

Primary Sidebar

Sign up for our newsletter

Recent Posts

The picture shows a college campus and students because the article is about FAFSA.

The FAFSA Simplification Act and Financial Aid

The FAFSA Simplification Act makes adjustments to the FAFSA. How will it affect your college student and their financial aid?

The picture shows an older couple hiking on a beautiful day to represent retirement and the SECURE Act.

The SECURE Act 2.0 and Retirement

The SECURE Act 2.0 builds on the initial SECURE Act of 2019, changing the retirement planning space, and increasing retirement flexibility.

Categories

  • College Planning
  • Cybersecurity
  • Estate Planning
  • Financial Planning Basics
  • Financial Planning Videos
  • Insurance & Risk Management
  • Investments
  • Retirement Planning and Cash Flow
  • Sensible Updates

Topics

401(k) Annuities bond returns Bonds Charitable Giving College Planning Company Updates Credit Health Disability Insurance diversification Divorce Donor Advised Funds Economy estate planning Federal Reserve Financial Goals Financial IQ financial planning Financial Strategy Forbes.com housing inflation Investments Investment Strategy IRA Legislation Liquidity Long-Term Care Medicare Mortgage Older Adult Living Recommended Books remote work Retirement Choices retirement planning Retirement Savings Risk Management Securities Social Security Social Security benefits Staff News Stock Market Stocks sustainable portfolios taxes

authors

Rick Miller
Sensible Staff
Frank Napolitano
Rick Fine
Josh Trubow
Chris Andrysiak
Marie St. Clare
Laura Williams
Gyb Spilsbury
Chuck Luce
Aimee Plouffe Polley

Footer

Services

  • Financial Planning
  • Financial Guidance
  • Portfolio Management

About Us

  • Our Philosophy
  • Team

Resources

  • Blog
  • Financial Planning Guidebook
Sign up for our Newsletter
Awards & Recognition

Follow Us

  • Facebook
  • LinkedIn
  • Twitter

Locations

Massachusetts

203 Crescent Street, Suite 404

Waltham, MA 02453

Phone: (781) 642-0890
Fax: (781) 810-4830

 

California

600 B Street, Suite 300

San Diego, CA 92101

Phone: (619) 573-4131​

Disclaimer

This content reflects the opinions of Sensible Financial®. We may change it at any time without notice. We provide this content for informational purposes only. Although we endeavor to keep the information up-to-date and correct, we make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability for a particular purpose or availability with respect to the website or the information, products, services, or related graphics contained on the website for any purpose. We do not intend the information contained in this website as investment advice and we do not recommend that you buy or sell any security. We do not guarantee that our statements, opinions or forecasts will prove to be correct. Past performance does not guarantee future results. You cannot invest directly in any index. If you attempt to mimic the performance of an index, you will incur fees and expenses which will reduce returns. All investing involves risk. You can lose any money you invest. There is no guarantee that any investment plan or strategy will succeed.

More important additional information and full disclaimer.

Copyright © 2023 Sensible Financial · All Rights Are Reserved
Legal Disclosure