ESG Small-Cap Funds: Sustainable Investing Options for US Portfolios
As the sustainable investing landscape evolves, small-cap ESG funds have emerged as compelling options for investors looking to diversify their portfolios while aligning with their values. With market capitalizations typically between $2.9 billion and $11.2 billion, these funds offer exposure to companies that might fly under the radar of most investors—yet many are making significant contributions to sustainability while potentially delivering impressive returns. Did you know some ESG small-cap funds have achieved one-year returns of over 160% against their benchmarks?
Whether you’re considering the five-star rated Calvert Small-Cap A fund with its $2.5 billion in assets, or exploring options like the green economy-focused Shelton Green Alpha Fund, the small-cap ESG universe presents unique opportunities. From companies specializing in dispensing technologies with negligible ESG risk to hotels demonstrating strong franchise relationships, these portfolios contain hidden gems that balance performance potential with sustainability goals. In this guide, we’ll explore the world of small-cap ESG investing—from understanding what defines these funds, to examining top options for US investors, highlighting notable companies in sustainable portfolios, and providing practical considerations to help you make informed decisions.
Understanding Small-Cap ESG Funds
Understanding Small-Cap ESG Funds
Definition and Market Capitalization Criteria ($2.9B-$11.2B)
Small-cap ESG funds focus on investments in companies with smaller market capitalizations while adhering to environmental, social, and governance criteria. These funds typically target companies within the Russell 2000 index and similar benchmarks. The market capitalization range for small-cap companies generally falls between $2.9 billion and $11.2 billion, though some funds may include mid-cap companies as well, as seen with the Shelton Green Alpha Fund (NEXTX) which extends into larger capitalizations while maintaining sustainable investment principles.
For example, the Calvert Small-Cap A (CCVAX) specifically concentrates on small, lesser-known companies within the Russell 2000 index and managed approximately $2.5 billion in assets as of March 2021. These funds typically require minimum investments ranging from $1,000 to over $2,500, making them accessible to many individual investors.
Evolution of ESG Investing Since Early 2000s
ESG investing has experienced significant growth and evolution since the early 2000s. What began as a niche investment approach has transformed into a mainstream strategy for investors looking to align their portfolios with their values. This evolution has been characterized by increasing sophistication in ESG metrics, broader market adoption, and growing recognition of the potential financial benefits of sustainable investing.
The development of comprehensive ESG ratings and research coverage has been crucial to this evolution. For instance, MSCI ESG research now covers 99.85% of assets in funds like the iShares ESG Aware MSCI USA Small-Cap ETF (ESML), demonstrating the extensive analysis now available to investors. This robust research infrastructure has helped legitimize ESG investing as a serious strategy rather than merely a values-based preference.
Key Differences Between Sustainable and Traditional Small-Cap Funds
Sustainable small-cap funds differ from their traditional counterparts in several important ways:
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Screening Criteria: ESG small-cap funds employ specific business involvement screens that exclude companies in controversial sectors. For example, the iShares ESG Aware MSCI USA Small-Cap ETF excludes companies involved in civilian firearms, controversial weapons, tobacco, thermal coal, and oil sands based on revenue thresholds.
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Risk-Return Profile: While sustainable funds aim to replicate the risk-return characteristics of conventional benchmarks like the MSCI USA Small Cap Index, they prioritize companies with strong ESG ratings, potentially altering the portfolio composition.
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Performance Considerations: ESG small-cap funds may show different performance patterns. For instance, the Pax Small Cap Fund (PXSCX) achieved nearly 80% return in the year leading to March 2021, though its long-term performance compared to benchmarks varied. Morningstar emphasizes the importance of analyzing beyond single-year returns to evaluate the true impact of ESG investing.
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Carbon Intensity Metrics: Sustainable funds often track and report their carbon footprint. The iShares ESG Aware MSCI USA Small-Cap ETF reports a weighted average carbon intensity of 79.95 tons CO2E/$M sales, providing investors with transparency regarding environmental impact.
Now that we’ve established a foundational understanding of small-cap ESG funds, their evolution, and how they differ from traditional options, let’s explore the top ESG small-cap fund choices available to US investors in the next section.
Top ESG Small-Cap Fund Options for US Investors
Top ESG Small-Cap Fund Options for US Investors
Now that we understand the fundamentals of small-cap ESG funds, let’s explore some of the top options available to US investors. These funds offer various approaches to sustainable investing while focusing on smaller companies with growth potential.
Calvert Small-Cap A (CCVAX): Features and performance
The Calvert Small-Cap A fund boasts a five-star Morningstar rating and focuses primarily on small, lesser-known companies within the Russell 2000 index. As of March 31, 2021, CCVAX managed approximately $2.5 billion in assets and achieved an impressive three-year return of 14.88%. This fund represents a solid option for investors seeking exposure to smaller companies that meet rigorous ESG criteria.
Shelton Green Alpha Fund (NEXTX): Green economy focus
Also earning a five-star rating from Morningstar, the Shelton Green Alpha Fund (NEXTX) concentrates on green economy growth, though it tends to include mid-cap and large-cap companies in addition to smaller ones. This fund demonstrated remarkable performance with a one-year return of 169.44% compared to its benchmark, the MSCI ACWI Investable Market Index, making it an attractive option for investors particularly concerned with environmental impact.
Parnassus Mid-Cap Fund (PARMX): Mid-sized company investment approach
While not strictly a small-cap fund, the five-star rated Parnassus Mid-Cap Fund (PARMX) invests primarily in mid-sized companies with an ESG focus. With a minimum initial investment of $2,000, this fund has shown consistent performance across various timeframes, though it slightly underperforms the Russell Mid-Cap Index. PARMX offers a balanced approach for investors looking to diversify beyond the smallest companies.
Pax Small Cap Fund (PXSCX): High-quality small companies strategy
The three-star rated Pax Small Cap Fund emphasizes high-quality small companies that meet ESG standards. In the year leading to March 31, 2021, PXSCX achieved nearly 80% return, demonstrating strong short-term performance. However, the fund has struggled to outperform its benchmark over longer time horizons, which investors should consider when evaluating this option.
Praxis Small Cap Index Fund (MMSCX): S&P SmallCap 600 tracking with ESG criteria
The Praxis Small Cap Index Fund Class A aims to mirror the S&P SmallCap 600 Index while applying ESG screening criteria. With a two-star Morningstar rating and a minimum investment requirement of $2,500, this fund provides a passive approach to small-cap ESG investing. Its performance has typically lagged behind its benchmark, highlighting the potential trade-offs between strict ESG criteria and market-rate returns.
With these fund options in mind, next we’ll explore some of the notable small-cap companies that frequently appear in sustainable portfolios, providing insight into the types of businesses these funds typically invest in.
Notable Small-Cap Companies in Sustainable Portfolios
Notable Small-Cap Companies in Sustainable Portfolios
Now that we’ve explored the top ESG small-cap fund options available to US investors, let’s examine some of the standout companies that appear in sustainable portfolios. These companies represent various industries and showcase different ESG risk profiles while maintaining their positions in sustainability-focused funds.
Aptar Group: Dispensing Technologies with Negligible ESG Risk
Aptar Group stands out among small-cap companies with its negligible ESG risk rating according to Morningstar’s assessment. Specializing in dispensing technologies, the company has established a strong long-term outlook driven by growth in the pharmaceutical sector. Aptar presents promising opportunities in active packaging, though investors should note concerns regarding its significant water usage. This company appears exclusively in sustainable small-cap funds, highlighting its recognition as an ESG leader despite being overlooked by traditional funds.
Wyndham Hotels & Resorts: Strong Franchise Relationships Despite Medium Risk
Wyndham Hotels & Resorts maintains a medium ESG risk rating, with specific challenges related to product governance, resource use, and carbon emissions. The company’s exposure to rising energy costs and regulatory pressures presents potential vulnerabilities. Nevertheless, Wyndham’s strong franchise relationships have helped it secure a place in sustainable portfolios. Like Aptar, Wyndham is found exclusively in sustainable small-cap funds rather than conventional ones.
Clearway Energy: Clean Energy Focus Despite Severe ESG Risk Rating
Interestingly, Clearway Energy appears in sustainable portfolios despite carrying a severe ESG risk rating. This apparent contradiction stems from the company’s focus on clean energy investment, which aligns with environmental goals. However, Clearway faces challenges related to negative environmental impacts, including air pollutants and hazardous waste. The company has begun addressing these concerns by assigning board-level oversight for ESG matters, signaling a commitment to improvement in sustainability practices.
Commerce Bancshares and Darling Ingredients: Varying ESG Profiles
Commerce Bancshares carries a medium ESG risk rating while delivering robust year-to-date returns. This balanced profile makes it attractive for sustainable small-cap portfolios seeking financial performance alongside reasonable ESG characteristics.
Darling Ingredients presents a low ESG risk rating but faces challenges related to significant energy consumption. The company must also navigate changing consumer preferences toward healthier food options. Despite these hurdles, its relatively strong sustainability profile has earned it a place in ESG-focused small-cap funds.
With these notable companies in mind, next we’ll explore the practical considerations investors should weigh when incorporating ESG small-cap investments into their portfolios, including risk management strategies and performance expectations.
Practical Considerations for ESG Small-Cap Investing
Practical Considerations for ESG Small-Cap Investing
Now that we have covered notable small-cap companies in sustainable portfolios, it’s essential to understand the practical aspects of incorporating these investments into your strategy. Similar to the considerations faced by Capital Accumulation Plan administrators, individual investors need to balance several factors when approaching ESG small-cap funds.
A. Minimum investment requirements ($1,000-$2,500+)
Many ESG small-cap funds require initial investments ranging from $1,000 to $2,500 or more, similar to traditional investment options. As noted in survey findings, investors interested in sustainable options often express willingness to adjust their contributions toward ESG-aligned investments, particularly among millennial investors who show significant interest in these options.
B. Performance benchmarking against traditional indices
When evaluating ESG small-cap funds, comparing performance against traditional indices is crucial. The reference guidance emphasizes that ESG characteristics should be considered as they relate to financial risk and return profiles. Plan administrators and individual investors alike should recognize that strong financial returns remain a priority alongside ESG factors, highlighting the importance of rigorous performance benchmarking.
C. Balancing return expectations with ESG criteria
Survey findings reveal that investors prioritize strong financial returns while also valuing ESG integration. This reflects the central consideration in sustainable investing: balancing profit motives with ESG principles. The three main approaches outlined in the reference – ESG Integration, Divestment, and Sustainability Focused investments – each offer different ways to balance return expectations with sustainability goals, allowing investors to align their portfolios with their personal values while maintaining financial performance.
D. Portfolio diversification strategies across market capitalizations
A well-structured approach to ESG investing involves diversification across different market capitalizations. Similar to how plan administrators formalize ESG beliefs in investment policy statements, individual investors should develop a clear strategy for incorporating small-cap ESG investments alongside other holdings. This diversification helps manage risk while maintaining alignment with broader sustainability goals. Proper education about how ESG factors are integrated within different investment options can help investors make informed decisions about allocation across various market segments.
ESG small-cap funds offer US investors a unique opportunity to align their portfolios with sustainable values while potentially capturing the growth potential of smaller companies. As we’ve explored, these funds range from five-star rated options like Calvert Small-Cap A and Shelton Green Alpha Fund to more specialized offerings like the Pax Small Cap Fund and Praxis Small-Cap Index Fund. Each provides different approaches to sustainable investing with varying minimum investments, typically between $1,000 and $2,500.
When considering these investment vehicles, remember to look beyond single-year returns and conduct thorough analysis of long-term performance and ESG risk profiles. Companies like Aptar Group, Wyndham Hotels & Resorts, and Clearway Energy demonstrate the diversity of businesses found in these portfolios. By incorporating ESG small-cap funds into a well-diversified portfolio, investors can support sustainable business practices while pursuing financial goals that reflect their personal values in an investment landscape that continues to evolve since the early 2000s.
