As investors diversify and fill out their investment portfolios, it may be prudent to consider the benefits of including some socially responsible exchange traded funds.
“We believe all investors should consider incorporating climate-change awareness into their investment portfolios,” BlackRock strategists, led by Richard Turnill, said in a research note.
BlackRock argued that adding climate-awareness investments does not have to significantly change an investor’s portfolio return pattern or compromise on traditional goals of maximizing investment returns.
For instance, investors can target so-called green companies or those that are the most environmentally conscientious while underweighting heavy polluters, without negatively impacting an investment portfolio’s overall returns.
“Smallish portfolio tweaks can make a big difference in reducing climate change risks,” BlackRock strategists said. “It is possible, for example, to cut a portfolio’s carbon emissions by around 70% while keeping the tracking error (the deviation of returns from the benchmark over time) within 0.3% annually.”[related_stories]
The shifts in climate-related regulations, extreme weather events, technological disruption and changing social attitudes can cause financial impacts that would affect all portfolios. For instance, the U.S. and China recently announced the ratification of the Paris agreement on climate change, an international pact on carbon emission reductions, which could fuel technological innovation and disrupt existing business models that may cause heavy pollution.
While this type of investment strategy may not seem like something a day-trader would enjoy as these developments happen over a long time, impact of climate-related regulations and technologies may affect every type of investor.
“The longer an investor’s time horizon, the more climate-related risks compound,” according to BlackRock. “Yet we see long-term investors also as better positioned to invest in new technologies that take time to bear fruit. And short-term investors can be affected by here-and-now regulatory developments and other near-term risk.”
Investors can target companies with a socially responsible mindset through ETFs, including the iShares MSCI USA ESG Select Social Index Fund (NYSEArca: KLD) and iShares MSCI KLD 400 Social ETF (NYSEArca: DSI), which provide broad exposure to companies with socially responsible characteristics.
KLD and DSI both include stocks with strong environmental, social, and governance records in areas that are relevant to their industries, including carbon emissions, labor management and corporate governance. KLD, though, excludes companies operating in the weapons, alcohol, gambling, nuclear power, adult entertainment and genetically modified organisms industries.
Additionally, strategies that revolve around Economic, Social and Governance, or ESG, principles have been quickly gaining traction as investors and advisors incorporate the qualitative benefits of ESG investments into their portfolios. For instance, the recently launched iShares MSCI EAFE ESG Select ETF (NasdaqGM: ESGD) and iShares MSCI EM ESG Select ETF (NasdaqGM: ESGE), which track developed and emerging market companies with high ESG ratings, began trading at the end of June.
SEE MORE: Do ESG Strategies Benefit ETF Investors?
With these socially responsible parameters, companies may be taking on a long-term business model. In an attempt to head off any environmental and social problems that their operations may create, companies are able to obviate potential regulations and diminish political risks ahead. Moreover, this proactive approach may diminish the risk of conflict with nongovernment organizations and other advocacy groups that can affect sales and brand recognition.
For more information on incorporating climate-change awareness themes, visit our socially responsible ETFs category.