After making the decision to apply the principles of SRI investing, many clients embark on the initial step of selecting a core stock fund. Traditional investors have literally hundreds of highly efficient core investment solutions. However, SRI investors aren’t so blessed—which is why I put together this list of top core stock SRI funds.
SRI funds need to start out by being financially sustainable. Some fund companies seem to believe that they can rake in higher fees on the backs of well meaning investors. The primary objective of a core fund is to match the market with as little cost drag as possible.
A core holding should have a robust diversity of securities to ensure that volatility in one company doesn’t dramatically affect performance. You also don’t need to stress about historical returns (a.k.a. track record) of a core fund. If the fees are reasonable and the stock selection is robust, you can expect that you’ll earn a return the may be slightly better or worse than the benchmark, but not by any significant measure.
The core SRI holdings identified below are made up of company constituents that score in the top 50% of their industry, based on their ESG (environmental, social, governance) scores. The differences arise with respect on fees and the strategy employed.
Unlike other funds, a parent company is infinitely more important than the direct manager of a core holding. Core holdings buy and hold hundreds of positions for the long-term that require minimal tactical oversight of a manager. The essential, but often overlooked work of a parent company is the shareholder advocacy work that defines responsible investing. This includes voting proxies on every position every year. Those fund companies that are more active in this area will issue shareholder resolutions that end up on the proxy ballot related to executive compensation, sustainability goals, and a wide variety of other topics that ensure that corporate manager priorities stay in line with shareholders. Traditional fund companies rarely if ever rock the boat by voting against management.
Some of the most important work on behalf of SRI investors happens before issues end up on the proxy vote. Through dialogue with management and strategic badgering when necessary, shareholder advocates can advance important topics for their stakeholders. Some of the more active fund companies will meet with dozens of executive management teams every year to review sustainability issues.
The following is a handpicked list of core funds for the SRI investor:
Domestic Core Solutions:
TIAA-CREF Social Choice Equity (TISCX/TICRX)
No. of Holdings: 795
Fee: 0.18% (Institutional Class), 0.44% (Retail Class)
Composition: Large and Mid Cap US Stocks
TIAA-CREF has a 100-year history of SRI industry leadership. Founded by a grant from the Carnegie Foundation to serve the retirement needs of college and university staff, TIAA-CREF offers investors more academically thoughtful shareholder advocacy than you will find at most financial institutions. TIAA-CREF has long established policies of proxy voting and meetings with the board of directors on issues that concern the SRI investor, such as environmental emissions and political contributions disclosure.
An advantage to this TIAA fund over the other options is that nearly one quarter of the fund is invested in small and mid sized companies. As you’ll notice, the institutional shares are much cheaper, but they typically require a minimum investment of at least one million dollars.
Dimensional US Sustainability Core 1 Portfolio (DFSIX)
No. of Holdings: 1874
Composition: Domestic Large, Medium and Small companies
Dimensional Fund Advisors (DFA) is known in the industry for its focus on enhancing index returns through so-called active passive strategies. After first focusing on large pensions and university endowments, DFA now additionally offers its strategies through an approved list of advisory firms that are certified after attending DFA training. This limitation means that many individual investors may have a hard time accessing this fund.
This DFA fund attracts those who want their core holding to emphasize company styles that have historically outperformed a standard large cap portfolio over time, including small companies, value companies, and robust earnings “quality” companies.
With regard to shareholder advocacy, DFA has a strong track-record of advocating for governance best practices by ensuring that shareholders are treated fairly. However, shareholders should not expect advocacy support for social and environmental issues.
Vanguard FTSE Social Index Fund (VFTSX)
No. of Holdings: 407
Composition: Large Cap
For the individual “retail” investor, this Vanguard fund is simple, but hard to beat from a cost perspective. Low prices and customer focus have attracted significant investment in Vanguard funds relative to its peers, but many—including its retired CEO Jack Bogle—have questioned Vanguard’s commitment to responsible ownership. Vanguard’s core clientele are focused on index returns and have generally rebuffed any calls to social responsibility, so you shouldn’t expect a particularly vocal or active shareholder engagement. While Vanguard may be slow to the party, it would be a mistake to count out their ability to become a major player in future. Vanguard’s tent could certainly be stretched to make more room for the SRI investor.
Foreign Core Solutions:
Calvert Developed Markets Ex-U.S. Responsible Index Fund (CDHAX
No. of Holdings: 673
Fee: 0.27% (Institutional Class), 0.62% (Retail Class A-Shares)
Composition: Foreign (Developed Country) Large Cap
Calvert’s mission is to steward capital responsibly and has been an active leader in the SRI space for many years. With Calvert, you get one of the most active shareholder advocates in the industry. In 1986, Calvert was the first investment firm to sponsor a shareholder resolution tied to a social issue—namely, labor-management relations. Today, Calvert’s shareholder resolutions are primarily focused on environmental disclosure and board diversity.
Unlike larger financial institutions which will argue that their best shareholder advocacy work happens in conversations that happen before proxy voting season, Calvert’s proxy voting history establishes itself as one of a small group of fund companies that are more likely to support a shareholder resolution than a management resolution. In 2016, Calvert supported 73% of shareholder resolutions and only 62% of management resolutions.
Institutional shares require a $100,000 minimum investment.
Dimensional International Sustainability Core 1 Portfolio (DFSPX)
No. of Holdings: 3003
Composition: Foreign Large, Medium and Small companies
Other than a foreign focus, everything in this fund fits the description used above for the Dimensional US Sustainability Core 1 Portfolio.
iShares MSCI EAFE ESG Optimized (ESGD)
No. of Holdings: 455
Benchmark: MSCI EAFE ESG Focus Index
For the individual “retail” investor, this iShares ETF is simple, but hard to beat from a cost perspective. iShares is managed by BlackRock, one of the largest asset managers in the world. Like Vanguard, it has only a marginal emphasis on SRI best practices, but its sheer size means that its limited efforts have more influence than many smaller institutions with more earnest shareholder advocacy initiatives.
Global Core Solutions:
Northern Global Sustainability Index Fund (NSRIX)
No. of Holdings: 824
Composition: Large Foreign (Developed Markets) and Domestic Companies
While most financial institutions only recently began talking about the importance of sustainable finance so as not to be left behind, Northern Trust has been at this work for nearly 30 years. Most recently, Northern Trust was named to the Corporate Responsibility Magazine’s list of the 100 Best Corporate Citizens for 2015. It practices what it preaches.
For both large institutional investors and smaller “retail” investors, you aren’t going to find a global fund with more reasonable fees available for average investors. This Northern Trust fund is a great “one stop shop” solution with a highly reputable company in this ESG space.
FlexShares STOXX Global Impact Index Fund (ESGG)
No. of Holdings: 669
Composition: Large Foreign (Developed Markets) and Domestic Companies
FlexShares is owned by Northern Trust and so you get the same parent company ESG focus, but, in this case, the product is an Exchange Traded Fund (ETF). The ongoing management fee makes the Northern Global Sustainability Index Fund listed above preferable unless you only have access to this ETF.
Selecting the core SRI fund that is right for you will be based on your account size and the flexibility of your custodian. Investing in any of these core funds listed above not only represents an act of personal responsibility, every dollar pledged to a SRI fund builds the demand for a more conscious and inclusive capitalism.