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What to know about adding a ‘green’ investment fund to your portfolio, now that Biden signed historic climate bill

  • President Joe Biden on Tuesday signed the Inflation Reduction Act, the largest climate spending package in U.S. history.
  • Investors flocked into "green" funds in the run-up to Biden signing Democrats' legislation.
  • But it can be a challenge to pick a so-called ESG fund. Here are some tips for investors.

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President Joe Biden signed the Inflation Reduction Act into law on Tuesday, the largest climate spending package in U.S. history.

The legislation earmarks $369 billion for climate and energy policies, including financial incentives for consumers and businesses that take steps to boost energy efficiency and reduce greenhouse gas emissions.

Consumers have poured money into investment funds focused on green energy this month, in the run-up to Biden signing the legislation.

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Green funds fall into a broader category known as "environmental, social and governance" investing. Investors interested in the ESG trend look at those three areas when deciding how to invest. The aim: Earn a good return on investment while supporting companies with strong track records in one or more areas.

Choosing an ESG fund that aligns well with your interests isn't straightforward, though.

"I think it can be really hard to know where to start," Fabian Willskytt, associate director of public markets at Align Impact, a financial advisory firm that specializes in values-based investing, previously told CNBC.

But there are some simple steps investors trying to make an impact on climate change can take to get started and invest with confidence.

ESG funds have become more popular

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Funds that allocate investor money according to ESG issues held $357 billion at the end of 2021 — more than four times the total three years earlier, according to Morningstar, which tracks data on mutual and exchange-traded funds.

Investors poured $69.2 billion into ESG funds, also known as sustainable or impact funds, last year, an annual record, according to Morningstar.

These funds come in a variety of flavors. Some may seek to promote gender or racial equality, invest in green energy technology or avoid fossil fuel, tobacco or gun companies, for example.

Women and younger investors (under 40 years old) are most likely to be interested in ESG investments, according to Cerulli Associates survey data. About 34% of financial advisors used ESG funds with clients in 2021, up from 32% in 2020, according to the Financial Planning Association.

At the heart of the continuing surge in demand for coal is the shortage of gas as the European Union moves to reduce the use of Russian gas — stopping short of a gas ban — while Russia responds by cutting supplies to the continent.Dwalker44 | E+ | Getty Images

Not every ESG fund is as 'green' as you might think

There are more than 550 ESG mutual and exchange-traded funds available to U.S. investors — more than double what was available five years ago, according to Morningstar.

"An individual investor has a lot more [ESG options] and can build a portfolio in ways they couldn't 10 years ago," Michael Young, manager of education programs at the Forum for Sustainable and Responsible Investment, has told CNBC. "Almost every [asset] category I can think of has a fund option, so we've come a long way."

But fund managers may use varying degrees of rigor when investing your money — meaning that environment-focused fund you bought may not necessarily be as "green" as you might think.

Here's an example: Some fund managers may "integrate" ESG values when picking where to invest money, but that strategy may only play a supporting (and not a central) role. Conversely, other managers have an explicit ESG mandate that acts as the linchpin of their investment decisions.

But investors may not know the difference between those approaches.

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