ABC + ESG? Education Savings Plus Socially Responsible Investing

Socially responsible investing is maturing, growing in assets, and moving into new territory. Find out where ESG investing is heading next.

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Key Takeaways

  • Socially responsible investing is more than a $12 trillion market

  • Concerns about climate may be helping spur investment into ESG funds
  • It’s now possible to combine education savings and socially responsible investing

Investors are looking to align their portfolios with their beliefs, and it’s no passing fad. ESG investing, which highlights environmental, social, and governance criteria, has been growing in popularity over the past 10 years. Today, new products are making it easier to match your portfolio with your passions—without sacrificing returns.

Whether your focus is on clean energy, diversity and equality in corporate leadership, the welfare of animals, the environment, or some other niche cause, you can likely find an investment to reflect your socially responsible investing goals.

ESG Fund Growth: It’s Been a Sustainable Trend

As of 2018, the total for U.S.-domiciled assets under management (AUM) using socially responsible investing strategies stood at $12 trillion, up 38% from 2016’s $8.7 trillion, according to US SIF: The Forum for Sustainable and Responsible Investment, which has tracked this investing style since 1995. Back then, net assets in sustainable investing were $639 billion. Assets are up 18-fold and have seen a compound annual growth rate of 13.6%.

Of that $12 trillion, individual investors hold $3 trillion, US SIF notes. And those investors have significantly more choices today than they did just a few years ago in this category of funds. US SIF’s report points out that ESG mutual funds hold the largest asset base, with $2.6 trillion in AUM in 636 mutual funds. Exchange-traded funds (ETFs) hold $7 billion in AUM. The remaining assets are held in alternative investment vehicles such as hedge funds, real estate investment trusts and private equity funds. 

Data from Morningstar® estimates that quarterly flows into open-ended ESG mutual funds and ETFs through the third quarter of 2019 were a record $13.5 billion versus last year’s $5.5 billion (also a record).

Jon Hale, director of sustainability research at Morningstar, acknowledged that this rapid growth started from a low base, but he believes interest will continue at a strong pace. “I believe we are in the relatively early stages of growth [in sustainable investing],” he said in a July 2019 webinar.

Socially Conscious Development

The idea of socially responsible investing has changed over the years. It means more than simply excluding certain investments, such as “sin stocks” like tobacco, alcohol, gambling, firearms, and so on. With ESG investing, the focus is on including companies that have sustainable business models or that are striving to do well in certain areas, such as improving the environment or supporting women’s education. 

ESG address three primary topics:

  • “E” stands for environment. This includes low-carbon strategies and other green environmental goals.
  • “S” stands for social. This involves the impact companies have on their workers, their communities, and society as a whole.
  • “G” stands for (corporate) governance. Good governance includes regulatory compliance, avoiding scandals, and representing the interests of shareholders.

Index provider MSCI has developed a number of indices that track key components of ESG investing, including the MSCI Global Sustainability Indexes, the MSCI Global Environmental Index, and the MSCI ACWI Sustainable Impact Index. MSCI ESG Research also has ratings for 32,000 mutual funds and ETFs for both equity and fixed-income investments, which helps investors glean greater insight into a given fund’s holdings.

Adopting ESG Investing in College Savings

Socially conscious investing isn’t just for traditional portfolios geared toward trading or retirement. They can also be used in 529 education savings plans, explained Dara Luber, senior manager of retirement at TD Ameritrade.

“ESG is becoming more prevalent among investors, especially younger investors, and those are the ones typically saving for their children’s education,” she said.

For people who want to use ESG in 529 plans, there are providers who offer ESG fund options. Luber highlighted that the TD Ameritrade 529 Plan offers two types of model portfolios with an ESG equity tilt: age-based portfolios, which automatically adjust as the child grows older, and static portfolios, where the investment mix stays the same until the owner adjusts the holdings. Luber gave the example of a static aggressive asset allocation that might have up to 84% earmarked to ESG equities.

Parents, grandparents, and other friends and family can contribute to a 529 plan. Individuals can contribute up to $15,000 ($30,000 if you are married filing jointly), per year per beneficiary without incurring federal gift taxes. Donors can also front-load five years of contributions at once, Luber noted. Depending on the state, these may be tax deductible, she added, and money used for qualified education expenses can be spent tax free.

ESG investing and college savings plans can be a great way to have engaging conversations with the kids about goal planning, long-term investing, and portfolio selection all at once.  And having ESG alternatives available for 529 plans is another way to allow people to align their investments with their beliefs. “People are becoming more aware of what’s out there, and they want to invest with their consciences,” Luber concluded.

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Key Takeaways

  • Socially responsible investing is more than a $12 trillion market

  • Concerns about climate may be helping spur investment into ESG funds
  • It’s now possible to combine education savings and socially responsible investing

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