If you pay any attention to the financial press, you’ve probably heard that sustainable investing is “controversial.” Investment professionals disagree loudly about what these investments are or how they should be evaluated. It gets a little judgmental, too, with both traditional and sustainable investors pointing fingers.
Everybody loves a good controversy but, in all truth, a lot of this argument is off the mark. If you want evidence of that, consider this: There’s one popular, well known category of sustainable investing that has never been subject to meaningful criticism or controversy. That category is water funds.
What are water funds?
Broadly, water funds and ETFs invest in global water infrastructure. They typically hold a diversified portfolio of companies involved in water utilities, infrastructure development, desalination technology, wastewater treatment, irrigation systems and related industries.
Given that clean water is a fundamental necessity for life and economic development, “clean water and sanitation” is No. 6 of the UN’s 17 sustainable development goals. It’s also true that expertise in building and maintaining global water infrastructure has lasting value.
So these funds attract both kinds of investors – traditional ones looking for financial returns and sustainable ones looking for impact. Everyone seems to get along.
The Tortoise example
Interestingly, though, water funds have some of the characteristics that other types of sustainable strategies get criticized for. One example, pulled from Equities.com’s Impact Funds list, is Tortoise Global Water ESG Fund.
TBLU is a passive fund that tracks the performance of a custom index developed by the asset manager, the Tortoise Global Water ESG Index. Like most water-related funds, it holds a global portfolio of stocks, broken out across numerous water-related industries.
From a performance perspective, TBLU has had moderate success – as of December 31, 2024, it’s earned about 10% per year, on average, since its inception in 2017. That’s about on par with its index, minus expenses. But it’s well behind the S&P 500, which has gained more than 14% per year over the same time frame.
Is that a problem? Well that depends. If your goal is to match the return of the S&P over all time periods, then yes. If your goal is to make 14% per year, also yes.
But not all investors have those goals. TBLU’s rate of return is strong on an absolute basis. Plus, the strategy can add diversification to a portfolio, since its holdings are not highly correlated to the broad stock market – that is, not performing the same as the S&P 500 is part of the point.
So TBLU has advantages and disadvantages like any other strategy. You don’t see critics panning it as illegitimate because it has failed to track the S&P 500.
A different story
The story might be different if this was an alternative energy fund, or a women’s leadership fund, or a minority empowerment fund or even a broad ESG fund focused on ethical business practices. These types of ESG funds are more common targets of controversy and critics are quick to highlight returns against the S&P 500 or another traditional index when the numbers aren’t favorable.
There’s an Aha Moment in this back and forth – in the end, the finger pointing doesn’t tell you very much. A sustainable investment strategy is still mostly an investment strategy. Funds that invest in global water infrastructure offer investors a specific risk/return profile and exposure to a vital industry with a growing global footprint.
The same can be said of alternative energy, women-run business and many other sustainable approaches. The same can also be said for funds that focus on AI, biotechnology, financial services or any other investable business sector. What matters is whether you get what you’re seeking from the use of your money.
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