Where ESG money managers say to invest in 2024

Published Wed, Dec 27 20233:59 PM EST

Socially responsible investors are optimistic heading into the new year. Sustainability-focused funds have seen outflows in all three completed quarters of this year, according to Morningstar. That comes as higher energy costs and the politicization of ESG investing frameworks weighed on traders. (The acronym is short for environmental, social and corporate governance.) However, ESG-minded money managers are bullish for 2024 given the likelihood that a recession has been avoided and the Federal Reserve will lower interest rates. They also remain confident in the value of screening for ESG themes, even if certain products have seen some investors pull out funds this year. "We think, ultimately, what you invest in long term is the quality of a management team," said Thomas Van Dyck, managing director at SRI Wealth Management, which is part of RBC. "The ESG factors help identify bad management teams and mitigate risk." CNBC Pro talked to two money managers with ESG focuses about where they'd allocate money heading into 2024. Here's what they said: Fund plays When it comes to a diversified portfolio, investors must decide their preferred risk exposure and time frame to decide how much should go to stocks and bonds, according to Van Dyck. For those wanting at least some fixed income exposure, he recommended the 3- or 5-year impact notes from Calvert Impact Capital, a responsible investing firm. (Van Dyck offered fund ideas rather than specific stocks or bonds to CNBC.) It's important to have exposure across equity styles, Van Dyck said. He may pair the Brown Advisory Sustainable Growth Fund (BIAWX) and the Parnassus Core Equity Fund (PRBLX) to have both growth and value. Another option he likes is the iShares MSCI KLD 400 Social ETF (DSI) , which he said is essentially a broad index ETF that is screened for ESG. For reference, the DSI is actually on pace to slightly outperform the S & P 500 this year. DSI .SPX YTD mountain The ETF vs. the S & P 500 this year Because small- and mid-cap stocks haven't appreciated as much as larger counterparts, Van Dyck said investors could even be overweight on those heading into the new year. He pointed to the Boston Trust Walden SMID Cap Fund (WASMX) and the Parnassus Mid Cap Fund (PARMX) as ways to add exposure. While there's opportunity in global equities, he said it's also important to recognize geopolitical risks. Van Dyck cautioned that he'd be the least exposed in international, but named the Impax Global Environmental Markets (PXEAX) as a place to play. The investing professional said the ETF is a particularly good pick given its exposure to renewable energy, a market that should grow for the next several years. Broadly speaking, Van Dyck is excited by the connection his clients see between the market and social causes. "They basically view investment as the economic expression of their thoughts and values," he said. Growth picks Meanwhile, Parnassus portfolio manager Shivani Vohra is all in on growth stocks, especially if the Fed cuts interest rates. Parnassus' Growth Equity Fund (PFGEX) , which has an ESG screen, performed nearly in line with the technology-heavy Nasdaq Composite this year under Vohra's management. That's despite the fund being underweight the "Magnificent 7," a group of megacap tech stocks whose big 2023 gains have accounted for a sizable chunk of the broader market's advance. (The fund doesn't have any Tesla or Meta exposure.) "Going into next year, the goal is just more of the same, which is really identifying good stocks that will go up, as simple as that sounds," Vohra said. "It'll be a little harder because there's not seven obvious choices to pick, but we're hopeful that we'll keep finding good opportunities." PFGEX .IXIC YTD mountain The fund vs. the Nasdaq Composite this year Vohra was able to compensate by leaning on growth software stocks like Adobe , Salesforce and Intuit . She is still bullish heading into 2024, finding the sector underappreciated by investors. Growth names within health care are also a good idea after the stocks underperformed in 2023 due to what she sees as temporary headwinds. She listed Thermo Fisher and Danaher as good life-science plays. "They're sort of the backbone and the 'picks and shovels' for innovation," she said. Both are integral parts of the trial design and production, she noted. And Vohra called Thermo Fisher a "one-stop shop" that's trading at a discount, diversified and has shown success cross-selling to customers. Within consumer discretionary, she said, LVMH was a good stock to hold. Vohra said it's at an attractive entry point due to concerns around the strength of the consumer, but she said the stock is insulated by its unique brands that can't be replicated. Vohra also listed Marriott and Airbnb as two growth travel stocks to hold as consumers increasingly prioritize experiences over goods. She called Marriott a top scale player, adding that there's room for growth in the luxury space. And Vohra said Airbnb has dominance and stickiness in long-term stays, even as some worried that it would lose the market share gains it won during the pandemic. "We think travel is something that consumers will go back to," she said. "This is something that we feel has legs over years."