Environmental, social and governance investing is all the rage these days, with all sorts of investors vying to put their money to work for good. With interest spreading beyond institutional investors and into the retail side of the market, Fidelity Investments wants to be all in.
The increased interest from retail investors is a big reason that the fund company launched the Fidelity Sustainability Bond Index Fund late last month. That new index fund, along with the Fidelity U.S. Sustainability Index Fund and the Fidelity International Sustainability Index Fund, makes Fidelity among the only fund companies to have ESG index mutual funds for every major asset class.
“ESG products tend to have a lot of traction with the institutional side of the marketplace … but overall we are seeing increased interest in the retail segment of the market,” said Colby Penzone, senior vice president for Fidelity’s Investment Product Group, in an interview with Investopedia.
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Fidelity Brings Diversification to ESG Investing
According to Penzone, by creating index funds with an ESG bent for all of the major asset classes, the Boston-based fund company can provide retail customers with the ability to diversify their portfolio based on ESG criteria. After all, with the launch of the bond index fund, investors will have exposure to equities and fixed income investments with a focus on doing right by the environment, society or from a governance perspective. “You never want a concentrated equity portfolio only,” said Penzone. “We’re making sure customers have access to broad U.S. and international markets as well as fixed income with an ESG overlay.”
Fidelity’s new sustainability bond index fund, which is open directly to individual investors and via third-party financial advisors and retirement plans, has an expense ratio of 0.20% for the Investor Class, 0.13% for the Premium Class and 0.10% for the Institutional Class. In addition to the three ESG-focused index funds, Fidelity also has two actively managed funds in the ESG area – the Fidelity Select Environment & Alternative Energy Portfolio and Fidelity’s FundsNetwork program. The latter gives investors access to greater than 100 ESG funds.
Impact Investing Poised to Grow, Led by Millennials
When announcing the new bond fund in late June, Fidelity said that it has about $25 billion in ESG mutual fund assets under management. The market size for ESG mutual funds and exchange-traded funds stands at more than $285 billion invested in the U.S. alone. With the majority of millennials interested in sustainable investing, the market is expected to explode in the coming years. According to the Forum for Sustainable and Responsible Investments, $8.72 trillion was invested in impact investments at the beginning of 2016, up 33% since 2014. Millennials, who make up the largest group of impact investors, could drive $15 trillion to $20 trillion of inflows into ESG investments over the course of the next 20 to 30 years, which would nearly double the size of the U.S. equity market.
“While the younger investing population is expressing more interest, we are seeing investors across the demographic spectrum,” said Penzone, noting that investors increasingly want to meld their personal social and ethical values with their investment goals and stressing that Fidelity wants to make sure it is giving them the opportunity to do that. While performance isn’t guaranteed, Penzone said that the broader the ESG focus, the better off investors will be. “We don’t believe there is a choice of giving up investments performance for investing in ESG. That’s why we launched this index product – because it gives investors broad exposure to the market despite the fact it’s applying ESG ratings and requirements,” he said.
Fidelity isn’t the only investment firm that is focusing more on ESG investing by rolling out new financial products. Vanguard disclosed in a Securities and Exchange Commission filing last week that it is launching a family of ESG ETFs covering both U.S. and international stocks that will be compared to ESG factors. The ETFs are slated to begin trading in September and will include companies and industries that are screened based on ESG factors. That means the ETFs won’t include companies related to alcohol, tobacco, guns, fossil fuels and nuclear power, reported Bloomberg. Vanguard already has an ESG-focused mutual fund – the Vanguard FTSE Social Index Fund – and these ETFs would be an extension of that offering.