By all appearance, folks in and around the markets know a bit about ESG investing, short for those investments that include an intentional evaluation of Environmental, Social and/or Governance concerns. For the full year 2020 – in no small part due to the creation of sustainable index investments –investors in retail products placed nearly $300 billion in sustainable assets[1], nearly double the whole of 2019. And those numbers are only going to rise over the next decade; already it’s being reported that nearly 50% of investors under 40 put their cash into ESG stocks.[2]

It’s probably fair to say that many in this growing crowd have been willing to give up a degree of upside potential in exchange for investing responsibly. ESG investments have, after all, earned a reputation for generating limited returns. We disagree. In fact, we’ll suggest that a high-conviction, high-active share ESG portfolio can add meaningful value to any investor’s portfolio.

ESG In Practice

While the current versions of socially responsible investing, or SRI, trace back to the 1960s, the application of non-financial metrics to ESG issues is a much newer concept, essentially coming to life in 2006 with the launch of the U.N.’s “Principles for Responsible Investment.” Unsurprisingly, both terms – SRI and ESG – have usually been grouped under the same “responsible investing” category. But the generalization is misleading. In practice, ESG is very different from SRI in ways that are important to asset management. Here’s why:

Essentially, socially responsible investing screens and excludes companies from the pool of eligible investment options based on a defined set of values (common SRI exclusions still include the so-called “sin stocks”). This use of a “negative screen” is the primary difference between SRI and ESG.

ESG, on the other hand, involves identifying attractive companies from the pool of available investment options based on their environmental impact, commitment to social responsibility and/or governance practices. In our experience, this kind of “positive screen” can lead to better portfolio performance. Said another way, the positive ESG screen supports better stock picking.

ESG and Performance

One of Shelton Capital’s entries into the ESG space – the Shelton Green Alpha Fund (NEXTX) – employs multiple layers of positive screening in its stock selection process. At the highest level, the Fund’s strategy is to find companies with real opportunities to solve the world’s problems while paying a reasonable price for the stock.

The NEXTX Fund is sub-advised by Green Alpha Advisors, and according to Green Alpha’s Chief Investment Officer Garvin Jabusch, the Fund is ultimately looking to invest in those companies that address one or more of “our global system-level risks: the climate crisis, worsening inequality, resource and degradation and human disease burdens.”

“Innovative companies addressing these systemic risks are leading long-term economic growth, and we think investing in those companies is our best opportunity to preserve and grow clients’ capital,” says Mr. Jabusch. A 96% active share (i.e., the percentage the portfolio differs from its benchmark) confirms the Investment Committee’s high conviction level to that end.

Thinking about more than just the future of the stock market has produced dramatic results.

Beyond beating 97% of its peers in Morningstar’s Mid-Cap Growth category with a 27.74% five-year annualized return, NEXTX has outperformed the broad market by more than 1,000 basis points (bps) for the same period. Even more impressively, the Fund’s one- and three-year returns – 55.13% and 41.99%, respectively – each topped the S&P 500 by more than 2,300bps. From its inception in March of 2013, NEXTX returned an average of 20.38% per year.

Average Annual Returns
(as of 9/30/21)
1YR 3YR 5YR Since Inception
NEXTX 55.13% 41.99% 27.74% 20.38%
MSCI ACWI IMI (Net)* 28.92% 12.37% 13.05% 10.35%
S&P 500 Composite Stock Index* 32.00% 15.97% 16.87% 14.90%

*It is not possible for individuals to invest directly in an index. Performance figures for an index do not reflect deductions for sales charges, commissions, expenses or taxes.

Total returns include changes in share price and the reinvestment of income dividends and all capital gains distributions. Performance figures represent past performance and are not a guarantee of future results. The investment return and the principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost; current performance may be lower or higher than the performance data quoted. For more current month-end Fund performance information, please call our office at (800) 955-9988.

ESG Going Forward

It’s not too much of a stretch to suggest that a heightened concern around climate change combined with a wave of activism around social and economic injustice will continue to push investors toward ESG investing. We’re already witnessing an application of ESG factors to stock and bond analysis by a growing crowd of investors. In the market’s quick response to this awareness, it’s reported that 200 new ESG funds are expected to become available by 2023.[3]

The truth is that many investors would love to use their money to help improve the world. Especially when investing with purpose can improve the bottom line.

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Shelton Green Alpha Fund’s environmental focus may limit investment options available to the Fund and may result in lower returns than returns of funds not subject to such investment considerations. There are no assurances that the Fund will achieve its objective and or strategy. Investing in securities of small and medium-sized companies, even indirectly, may involve greater volatility than an investment in larger and more established companies.

Short-term performance may reflect conditions that are unsustainable and thus may not be repeated in the future. 

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[1] Simfund, Broadridge, GBI. Data as of November 2020. Closed-end funds, funds of funds excluded; Money Market funds included.

[2] World Wealth Report 2020

[3] Collins, Sean, and Kristen Sullivan. “Advancing Environmental, Social, and Governance Investing.” Deloitte Insights, February 20, 2020.