An ESG fund changes the world, one share at a time

In 1987, Smith began working at Trillium Asset Management in Boston, which now manages approximately $ 5 billion. Smith and Trillium took over as $ 438 million

Century Green Balanced
sub-advisor of the fund (ticker symbol: GCBLX) in 2005. Over the past three years, the fund has outperformed 89% of its peers in Morningstar’s 50% to 70% equity allocation category, with an annualized return 16.8% against 13.5% for the category. The fund’s 1.47% expense ratio is higher than the category’s 0.84%, but some of that extra cost goes to its environmental, social and governance, or ESG, advocacy work.

This work is led by the ESG advocacy team at Green Century Capital Management, separate from Trillium, which engages in activist campaigns, often involving shareholder proposals. According to Green Century, it is the only U.S. mutual fund company 100% owned by environmental and public health nonprofits, such as the California Public Interest Research Group. All his profits go to this work.

Smith, 64, was inspired by the antagonism she saw about sustainable investing in the 1980s.

“I was brought up in the Roman Catholic Church and the United States Conference of Catholic Bishops had published a series of pastoral letters on the environment, peace, and the economy that really laid out the vision of trying to to have a world that seeks a certain degree of justice, equity and what you might call a sharing economy, ”she says. “By reading the negative press on [the letters] inspired me to say, “No, this is really a big problem. ”

Still, she realized that companies should lead the ESG charge. “The unions were all but destroyed” after the Reagan administration broke off the 1981 air traffic controller strike, she said. The deregulation of the industry by the administration showed that the government “did not want to do anything”.

“Businesses are the ones with the power,” she said. “So let’s see how to change businesses. “

One way to change businesses is to invest in green bonds that are assigned to a specific sustainable project. The fund bought its first green bonds in 2008 and, as of September 30, held 21% of its portfolio there. These bonds have an audit report trail that investors can check to see that the money is being spent for its intended use.

“A very pure green bond [the fund owns] would be a

Apple

one, ”she said. Apple (AAPL) has so far borrowed some $ 4.7 billion in green bonds for projects such as installing solar panels on its factories.

That said, finding profitable, high-quality businesses in which to invest is paramount for Smith and his two co-directors, Matthew Patsky and Paul Hilton. The fund, in accordance with its mandate, may not invest in fossil fuel companies. He will generally hold between 65 and 80 shares with higher growth rates than the

S&P 1500
benchmark average company, but with comparable valuations. (The fund typically has an equity / bond ratio of 60%, like most balanced funds.)

While some green funds invest heavily in speculative alternative energy companies in the solar sector, Green Century Balanced is taking a more cautious approach. Recently, it only held 1.9% of its portfolio in what it calls renewable energy and energy efficiency. Smith says most solar cell manufacturers face excessive competition from China, which has trivialized the industry. “You never want to invest in an industry where everyone is trying to be the cheapest producer,” she adds.

she holds

First solar

(FSLR), the leading US manufacturer of solar panels, citing its scale.

Smith is still trying to find companies that can help with the green energy transition. A recent share purchase is

SolarEdge Technologies

(SEDG), which manufactures high-end solar inverters. These convert the direct current produced by solar panels into alternating current used by household appliances, and they allow homeowners or businesses using solar energy to sell the excess energy they produce to the electricity grid or buy electricity from the grid when they do not have it. quite. “Essentially [SolarEdge] allows a household or business to get the most out of solar power from their roof, ”says Smith.

Although a bottom-up stock picker, Smith combines fundamental research with macro analysis. In the depths of the pandemic market downturn in March 2020, it has built a position in

Trane Technologies

(TT), an energy efficient heating, ventilation and air conditioning company.

“With the airborne nature of the virus, high efficiency filtration and ventilation was a huge area” to prevent the spread of the virus. But now that the Trane share price has risen nearly 150% since March 30, 2020, Smith has reduced that position.

More recently, the fund bought shares in a daycare company,

Luminous horizons family solutions

(BFAM), in anticipation of parents needing more child care when they return to the office after the pandemic.

With more traditional blue-chip companies, Green Century’s advocacy team often has shareholder resolutions they work on to encourage these companies to improve their environmental records. More recently, Green Century filed a “Right to Repair” resolution with Apple to sell spare parts for its devices so that consumers can repair them instead of throwing them away, in an effort to reduce electronic waste. . The company withdrew the resolution because the tech giant finally agreed to the request in November.

Today, Smith’s vision of changing American businesses for the better is no longer seen as an extravagant concept. Rather, it is the common goal that she shares with millions of ESG investors.

Corrections & amplifications

Cheryl Smith had been a professor of economics at the University of Denver. An earlier version of this article incorrectly said that she had taught at Yale University.

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