Green Model Portfolios

CPM Investing LLC - Research and Investment Publications

Model Portfolios of ETFs for High Return and Low Variability

The model portfolios in the Emerald publication mirror those in Diamond but hold the Green Bond ETF "GRNB." Emerald has been designed for those wanting to advance environmental objectives with their investing.

The expected annualized returns of the Emerald model portfolios range from 12% to 21%. The primary model portfolio is Emerald (sg271). The other model portfolios in the Emerald publication are variations of this primary model portfolio.

Each model portfolio in Emerald has a stable allocation of 20% to the Green Bond Fund ETF "GRNB." GRNB invests in bonds that are issued for environmental projects that pass specific Climate Bonds Initiative standards set by the United Nations. The standards are sector-specific eligibility criteria that are approved by a third-party verifier. Green Bonds finance renewable energy, energy efficiency projects, sustainable water, and low carbon transport.

Industry Background

“Impact investing” is one of several terms that have been used over the years to describe investment activities that seek to produce non-financial benefits in addition to investment returns. Terms such as socially responsible investing (SRI), ethical investing, and sustainable investing have been used. The most current and broadest term is ESG. ESG stands for environmental, social, and governance investing. For ESG investments in company stocks, companies must pass certain criteria in these three areas. Environmental criteria include energy use, waste, pollution, and natural resource conservation. Social criteria include a company’s relationships with employees, customers, and communities of operation. Governance covers criteria like the company’s leadership and executive pay.

As we compared ESG investments using stocks, we found that the companies that made up the largest portions of many ESG stock indexes are very similar to the stocks in the DJIA, S&P and Russell 1000 indexes. A high portion of the weight of ESG and non-ESG stock indexes is in Apple, Alphabet, Microsoft, etc. By investing in the DJIA, one is already investing in companies that are within the top holdings of most ESG stock ETFs.

In addition, we found that stock-based ESG investing has only an indirect impact. One is buying the stock of companies that put some emphasis toward ESG initiatives. While this rewards good corporate citizens, it is not direct investment in ESG projects.

Green Bond Fund ETF

We sought to use an ESG ETF that has a more direct impact. After researching several ETFs, we decided upon the Green Bond Fund ETF: https://www.vaneck.com/etf/income/grnb/overview/.

This ETF invests in bonds that are issued for environmental projects that pass specific Climate Bonds Initiative standards set by the United Nations. The standards are sector-specific eligibility criteria that are approved by a third-party verifier. Green Bonds finance renewable energy, energy efficiency projects, sustainable water, and low-carbon transport. In the Emerald model portfolio, the Green Bond Fund would be the main bond holding.

We do not attempt to change weights in GRNB because this ETF does not have a long enough history to make dynamic weighting practical. Also, having a stable allocation to the Green Bond investments is a better fit for having a consistent impact.

The stable allocation to GRNB presents some additional risk to the model portfolio. We will monitor GRNB and will replace with ETF IEF (iShares US 7-10y Bonds) if there is an unsolvable problem with GRNB.

Model Portfolios of ETFs for High Return and Low Variability

Green Model Portfolios

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