Exchange traded funds and other strategies that incorporate Economic, Social and Governance, or ESG, principles have been quickly gaining traction as a way to help investors align portfolio investments with their core values and still achieve long-term goals.
ETF Trends publisher Tom Lydon spoke with Brian Diessner, Senior VP and Head of Sales at Global X, at the Inside ETFs conference that ran Jan. 22-25, 2017 to talk about increasingly popular socially responsible and ESG-centric investment strategies as a core portfolio position.
“Broadly people can think about it in different buckets of impact investing in things like water and a lot of other direct investments, and then you’ve got socially responsible investing, SRI, ESG – environmental, social, governance – as well as another category that we think of at Global X: values-based investing,” Diessner said.
For example, the Global X Conscious Companies ETF (NasdaqGM: KRMA) tries to reflect the performance of the Concinnity Conscious Companies Index, which tracks companies that achieve financial performance in a sustainable and responsible manner and exhibit positive ESG characteristics.
“Bottom line is it’s finding investments that align with the interests and passions of the ultimate end investor,” Diessner said.
Some may question the up-and-coming theme as either a passing fad, but more are warming up to ESG and socially responsible investments as a sustainable long-term strategy.
“Investors don’t need to sacrifice returns in building portfolios that align with their values,” Diessner said.
Specifically, KRMA draws on dozens of sources to identify companies that have demonstrated a long term focus on creating positive outcomes for five stakeholder groups, including employees, customers, communities, suppliers, and stock and debt holders,
The underlying portfolio undergoes a three-step screening process that analyzes companies’ adherence to academically-backed Multi-stakeholder Operating System to identify those that operate in a sustainable and responsible manner.
Firstly, the index uses forty information sources and public rankings to identify and evaluate companies based on ability to achieve positive outcomes across all five stakeholder groups, such as employee productivity, customer loyalty and corporate governance.
In the second step, the index uses composite analysis to apply deeper evaluation based on employee engagement, executive integrity, customer relationship quality, labor and human rights, and quality of financial reporting.
Lastly, a screen for consistent achievement is applied – a company must be qualified for inclusion in the Multi-stakeholder Operating System investable universe for at least three consecutive years. The index is then equally weighted.
“It utilizes traditional analysts’ framework around you know balance sheet items like earnings statements, right, but it goes beyond that to include intangible items like customer satisfaction, employee engagement, relationship with the community,” Diessner said. “These are all positive attributes that we believe is a more holistic approach to financial analysis and offers the potential for better return.”