hands holding dirt and a small plant with environmental icons around it - representing ESG investing

How to Pick a Great ESG Fund

Investing for Impact in the Public Markets

If you are reading this article, you are likely interested in sustainable investing—aligning your investments with your values and making a positive impact with your portfolio.   And you want to be smart about how you make your investment decisions. 

The most popular way to do this is with mutual funds and ETF’s (exchange traded funds) that consider a firm’s environmental, social and governance (ESG) scores in selecting their holdings. 

Unfortunately, there are many potential pitfalls to this approach.

Understanding ESG Ratings and Scores

Traditional ESG scores are designed to measure the economic risk to a company resulting from operational considerations such as energy usage, labor practices and business ethics.   They can allow for helpful comparisons between different firms within an industry, although the scores from the various major rating agencies can vary widely.   

What may be most concerning is that these scores were not specifically designed to measure what many sustainable investors care about most—the risks to people and planet.  There are also potentially great differences between fund managers in their approach to portfolio construction and shareholder advocacy.  (See our article on the ESG Conundrum for more detail).

The following three tables compare two large ESG funds which at first appear to be very similar.  They highlight the wide array of powerful data resources that can be used to uncover important differences and help investors make well-informed decisions in keeping with their values and goals.

The first fund is the iShares ESG Aware MSCI US ETF (ticker ESGU). It is perhaps the largest ESG fund in the U.S.  iShares is owned by Blackrock, which is behind several major ESG funds.    The second is the Calvert U.S. Large Cap Responsible Index (ticker CISIX).  This is another large fund from an established industry leader (Calvert is now a subsidiary of Morgan Stanley).

How to pick an ESG Fund — Part 1: Big Picture Considerations

The first table uses information from YCharts  (a popular financial data aggregator) to illustrate how, despite a few differences, these funds have a great deal in common. 

Both are large, established multi-billion dollar funds designed to track an index of large capitalization U.S. stocks that score well on ESG metrics. 

While they have similar holdings, the Calvert fund has less overlap among its largest 15 holdings with the those of the S&P 500 index, and has a modestly heavier growth and small company orientation than the iShares fund.

They  both have low expenses, low turnover and similar yields and returns.  Both receive the same top ESG rating from MSCI and have strong positive momentum in their ESG scores.   

Table 1. Fund Overview (Ycharts)
As of 9.1.22 iShares (ESGU) Calvert (CISIX)
ESG Aware US Large Cap
E.S. ETF​ Resp Index
(ESGU) (CISIX)
Investment Style iShares (ESGU) Calvert (CISIX)
Category US Lg Blend US Lg Blend
Growth-Value % 18% 22%
Small & Mid Cap % 20% 26%
Top 15 S&P in Top 15 87% 60%
Key Operating Statistics iShares (ESGU) Calvert (CISIX)
Fund Size ($billions) 22.2 3.9
Expenses 0.15% 0.24%
Turnover 21% 10%
Yield 1.39% 0.97%
5 Yr. Cumulative Return 74.8% 76.2%

How to pick an ESG Fund — Part 2: Industry Exposures and Ratings

The next table introduces data from Morningstar and As You Sow, long-time leaders, respectively, in the fields of providing information on mutual funds and engaging in shareholder activism.

This comparison data begins to identify key differences between the funds. While both funds earn the second highest sustainability rating from Morningstar (4 globes), the Calvert fund scores higher on risk adjusted returns. 

A more dramatic difference is that the Calvert Fund has less than 1/3 the fossil fuel industry exposure of the iShares fund which has significant holdings in companies such as Exxon and Chevron. 

Table 2. Digging Deeper (Morningstar & As You Sow)
Fund Ratings (Morningstar) iShares (ESGU) Calvert (CISIX)
Globes (sustainability) 4 4
Stars (risk adjusted return) 4 5
Fossil Fuel Involvmenet 6.15% 1.84%
Industry Grades (As You Sow) iShares (ESGU) Calvert (CISIX)
Carbon D B
Forests D A+
Gender A B
Civilian Firearms A B
Prisons D C
Weapons D B
Tobacco B B

This leads to a dramatically different fossil fuel free ratings from the “Invest your Values” tool provided by As You Sow, which gives iShares a D grade and Calvert a B.

Calvert also scores significantly better for having less exposure to companies involved with deforestation and military weapons.

The As You Sow industry information indicates the degree to which potentially offensive or harmful activities are excluded from a portfolio. This is often referred to as negative screening or socially responsible investing (SRI). 

How to Pick an ESG Fund--Part 3: Advocacy and Impact

The final table highlights some of the biggest differences between the funds. It includes proxy voting information from the transparency tool on the Calvert website, as well as impact scores from next-gen data providers YourStake and Ethos ESG which focus on risks to people and planet (as opposed to company stock price).    

The proxy voting record highlights a stark difference between the two funds, with Calvert typically voting with shareholders and iShares generally siding with management.  

Table 3. The Big Differences (calvert, YourStake, Ethos)
Proxy Voting (Calvert website) iShares (ESGU) Calvert (CISIX)
Vote with Shareholders 22% 87%
Vote Against Mgt 4% 26%
Relative Impact Scores (YourStake) iShares (ESGU) Calvert (CISIX)
Health 30%
Environment 73%
Human Rights 8%
Equal Opportunity 52%
Accountability 4%
Overall Scores (Ethos) iShares (ESGU) Calvert (CISIX)
Impact Rating B (65) A (93)
Advocacy Rating C A

Unlike traditional ESG rating services which depend largely on voluntary reporting by companies being rated, YourStake looks to data from government sources, regulators, academic research and trusted NGO’s (non-governmental organizations).  

They consider dozens of data series such as air and water pollution (health), fossil fuel, clean energy, and single use plastic production (environment), forced labor and arbitration (human rights), and gender equity and compensation scales (equal opportunity).

Their summary scoring system indicates the % by which one fund or portfolio outscores another on five major impact themes. 

Ethos tracks 280 ESG metrics on over 13,000 securities, and organizes this data by various causes, including the U.N. Sustainable Development Goals

It also provides a summary output, which boils down to two scores: one for impact and one for advocacy.  These overall ratings from Ethos provide a very helpful recap (currently available as a free online service). 

Hiring an Expert Guide

Many ESG investments are not all that they appear to be, which is why making good socially responsible investment decisions is not a simple task. 

Access to high-quality data is essential.  We presented information from six different data providers.  Most of the information provided above is either not available to the public or requires a paid subscription for full access.  But it’s not just the raw data, it is also knowing which pieces of information are most valuable and how to put them together. 

This underscores the value of working with an expert advisor, such as Colorado Capital Management, to help you with constructing your portfolio and making a difference.  We are passionate about investing for impact and would be happy to assist you on this journey.

Contact us to schedule an introductory appointment.

Steve Ellis, Senior Advisor, CFA

Steve Ellis has spent his career making an impact, so it’s not surprising that Colorado Capital Management’s founder and president launched the firm’s entry into impact investing.

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Jason Black, Financial Advisor (CFP)

Jason Black, CFP ®

With a drive to live purposefully and passionately, Jason focuses on helping clients to live in abundance.

Jason is a partner and senior advisor at Colorado Capital Management.  He brings more than 15 years of varied experience working in the financial services industry. He joined CCM after a long search to find the perfect firm that aligned well with his values and mission. Jason is passionate about helping individuals and families live abundant and intentional lives. He is proud to be part of a Certified B Corporation, doing meaningful financial and investment planning for clients, while also focusing on socially responsible business practices and making a positive impact. As a Chartered SRI CounselorSM, Jason has a strong background and keen interest in sustainable investing and enjoys helping clients understand the merits of this approach. Jason is also a Certified Financial Planner™ and has a bachelor’s degree in business administration from the University of Colorado. 

Before joining CCM, Jason worked with Jackson National as a consultant for financial advisors. He helped create meaningful connections with families, creative asset allocation strategies, and tax-advantaged retirement-income solutions. During his tenure there he worked with over four thousand financial advisors across the country, was recognized multiple times as consultant of the year, and also managed a team of twenty-five individuals. 

Jason is happily married to his wife, Bridget, of thirteen years, who he met while in college at CU. Together they have a son and daughter, and a Frenchie named Coco Disco. They live in the Whisper Creek neighborhood of Arvada. When Jason is not at work, he and his  family can often be found making turns in Summit County, wakesurfing in Glendo, WY, cooking, dancing and traveling.

Erica Loughrey, Associate Financial Advisor

Erica Loughrey

Erica is passionate about providing purposeful advice to help clients enjoy a meaningful life.

Erica is an advisor at CCM. She joined the firm in 2021, fulfilling her desire to work for a values-based company with a deep commitment to making an impact. She moved from her hometown of Anchorage, Alaska and quickly fell in love with the sunny and beautiful state of Colorado. She brought with her prior experience as a para-planner and is delighted to be engaged in a profession that empowers individuals to flourish financially. She believes strongly in exceptional client service and creating lifelong generational relationships.

In 2022, she accomplished two of her major career goals, finishing her master’s degree in financial planning (MSFP) and earning her Certified Financial Planner™ designation.

Erica enjoys spending time outdoors and traveling to exotic locales. In her free time, you can find her out skiing, hiking, scuba diving, practicing yoga or jetting off to new places to explore. She has a never-ending list of travel plans, having already visited over 20 countries, and feels lucky to have so many wonderful opportunities and adventures.

Lee Strongwater, Senior Financial Advisor

Lee Strongwater, WMS

An entrepreneur and world traveler, Colorado Capital Management vice president and co-owner Lee Strongwater brings a global perspective to investments and life planning.

For more than 15 years, Lee has passionately assisted clients with their financial planning and portfolio management needs. He especially enjoys helping them live more meaningful lives and invest in ways that are aligned with their values. Lee holds a bachelor’s degree in political science from the University of Colorado and a master’s degree in international affairs from Columbia University. He also holds the Wealth Management Specialist (WMS) certification.

Before joining Colorado Capital Management, Lee was a managing partner at Strongwater-Schott, a fee-only investment management and financial planning firm in Denver. Prior to that, he was an entrepreneur who helped start and manage several small firms, including a children’s product company that went public in 2007.

Lee is an active volunteer for several organizations. He is a past President and current member of the Board of Directors for the Boulder Jewish Community Center, an organization that is highly respected on both a local and national level. Lee is also on the Investment Committee of Girl Rising-Global Education, a venture philanthropy fund that invests in social entrepreneurs with culturally-relevant ideas. The fund’s investments promote gender equality and improve educational outcomes for girls and boys living in poverty in Kenya and India.

Lee is married and has two daughters. He enjoys hiking, skiing, traveling—mostly to Mediterranean countries—and trying out new recipes from his journeys. When he’s not on the go you can find him engrossed in a book.

Steve Ellis, Senior Financial Advisor

Steven Ellis, CFA

Steve Ellis has spent his career making an impact, so it’s not surprising that Colorado Capital Management’s founder and president launched the firm’s entry into impact investing.

He brings over 30 years of experience as a financial advisor to high net worth clients. His early work included teaching college courses in accounting and finance, consulting for a major accounting firm, and researching and acquiring investments as the chief due diligence officer of a leading national financial planning firm. Since 1989, he has advised individual and institutional investors on the management of their wealth. Steve is a Chartered Financial Analyst (CFA), holds a business degree from the University of Colorado, magna cum laude, and a master’s degree from Cornell University.

Steve launched the firm’s entry into impact investing in 2012 and is committed to helping build the field. Steve is a passionate speaker on the topic. He has taught about impact investing at various conferences and classes around the country, including as a past faculty member at Middlebury Institute of International Studies. He is listed in the Who’s Who in Impact Investing.

Steve is married, with two daughters, enjoys hiking, biking, skiing, tennis and bridge, and is actively involved in the community. He has served on numerous boards and committees for a wide array of nonprofit organizations, including the Boulder JCC, Rose Community Foundation, Jewish Family Service, and Friendship Bridge. His passion for impact and community service helped lead Colorado Capital Management to become a Certified B Corporation and to build a strong culture of volunteerism and philanthropy.