Where we invest and what companies we support has an impact on society as a whole, and funds can help investors use their money to make a positive impact.
Actively managed mutual funds have many ways to make a difference, including:
- divesting from companies they find objectionable;
- using their power as large shareholders to file and vote on resolutions that encourage companies to address important issues and risks; and
- engaging directly with a company’s management team.
Many funds have used all or some of these tools for decades and made significant progress.
Index funds, however, have been an exception to this process. Index funds by design passively track a particular market index, so they can’t take action against a company that gets in trouble. For example, since Wells Fargo is in the S&P 500 index, passive funds tracking the S&P 500 had no recourse when the bank admitted to illegally opening millions of fraudulent accounts and was fined $1 billion. Actively managed funds, on the other hand, could choose to sell Wells Fargo and move on to other bank stocks
Index funds are often among a company’s largest investors, so the best way they can affect change is to vote on shareholder resolutions. But major index fund companies, like Vanguard or BlackRock (iShares), rarely vote on these proposals. And when they have voted, they usually supported the status quo and voted with management rather than pushing companies to do better.
Index funds are starting to step up
There are signs that index funds are starting to get more involved. This year, BlackRock CEO Laurence D. Fink told S&P 500 companies that they needed to conduct business more responsibly. “To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society,” he wrote. This message, coming from the head of a giant index fund provider, caused quite a stir in the financial industry.
Index fund providers are also beginning to vote for change. Last year, BlackRock, Vanguard, and State Street made the news when, for the first time, they voted in favor of a resolution that required Exxon to report on the financial impact that climate change could have on the company.
Vanguard also voted in favor of 47% of shareholder proposals regarding a company’s board of directors in 2017, compared to supporting just 17% of such proposals in 2016.
It’s great to see that index fund providers are paying more attention to these issues, but it’s also worth remembering that actively managed funds, particularly sustainable funds, have been doing this for years.
Funds that are designed to make a difference
Sustainable funds have comprehensive strategies for making a difference in the world. They have strong voting records, and they don’t just vote on shareholder resolutions: they also spearhead specific initiatives and work to get the votes needed to pass them.
Many funds go the extra mile to make an impact by engaging with a company’s managers in an attempt to help a company move forward.
Active funds have an additional tool: if their shareholder resolutions and engagement efforts aren’t effective, they can walk away and invest in other companies that they believe are better addressing important issues and risks.
Invest in Funds that Can Make a Difference
Many people want to invest in funds that seek to both build wealth and build a better world, but they don’t know where to start.
Should they own index funds or actively managed funds? How can they tell if a fund is up to their standards?
The Sustainable Impact Fund (SRIFX) aims to makes it easy for investors to own a portfolio of stock funds that they can feel good about.
✔ Targets funds with strong recent returns & strong ESG ratings
SRIFX targets funds that have strong recent returns and strong environmental, social and governance (ESG) ratings. SRIFX may invest in both index and actively managed funds as long as they meet our standards.
✔ Emphasizes impact investing funds
SRIFX seeks to reward funds that act as impact investors by engaging with companies to help them improve their businesses and work to address important risks. Impact funds still must meet our rigorous performance requirements to be included in SRIFX.
As of March 31, 2018, SRIFX owned index funds, actively managed funds and impact funds. See the full portfolio here.
Invest in SRIFX
You can invest directly for as little as $1,000. Call 1-800-455-3863 to open an account or click here to open an account online. You can also find SRIFX at most major brokers, including Charles Schwab and Fidelity.
The FundX Upgrader Funds invest in funds and ETFs and have no direct exposure to any individual stock, such as Wells Fargo.
Publication Date: Upgrader Quarterly: Spring 2018