Socially responsible investing is going mainstream as a number of money managers roll out exchange traded fund strategies that target characteristics described under sound ESG or environmental, social and governance principles.
Socially responsible investing now accounts for about one in every six pooled investing dollars in the U.S., or nearly $6.6 trillion at the start of 2014, reports Jeff Brown for U.S. News. Investment pools that utilize SRI principles, which include ESG investments or simply sustainable investing, expanded to 925 in 2014 from 55 in 1995.
The socially responsible investing theme covers a wide range of investments. For instance, some funds shun the defense or fossil fuel industries while others exclude gun makers, alcohol or tobacco producers, or companies deemed unfriendly to their workers, shareholders or the environment.
Investors can easily access the space through ETF strategies as well.
“ETFs are a valuable tool for helping to improve risk-adjusted returns over the long term, and this characteristic is particularly important for investors focused on socially responsible strategies,” Tom Lydon, president of Global Trends Investments and publisher of ETF Trends, told U.S. News.
The ESG and sustainable investment theme may continue to grow on interest from women and millennials, according to Wells Fargo Private Bank.
“They don’t see their investment portfolios existing in a vacuum, and want them to reflect their view of the world and the future,” Lloyd Kurtz, head of social impact investing at Wells Fargo Private Bank, told U.S. News.
[related_stories]The sustainable investments are not just a gimmick. A 2015 report by Morgan Stanley found that “investing in sustainability has usually met, and often exceeded, the performance of comparable traditional investments. This is on both an absolute and a risk-adjusted basis, across asset classes and over time.”
The outperformance is attributed to better governance practices, along with diminished profit-eroding conflicts with workers, regulators and consumers. Additionally, some popular screens include the exclusion of poison-pill anti-takeover provisions, transparency about executive pay and policies that favor shareholder rights.
“SRI/ESG funds do well for the same reasons other investment strategies do well: good diversification, good asset selection, and good risk management,” Kurtz added.
Investors interested in incorporating sustainable investment ideas into a core strategic position have a number of options available. For instance, 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, were some of the earliest options to hit the market.
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.
The 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, revolve around Economic, Social and Governance principles.
The SPDR MSCI ACWI Low Carbon Target ETF (NYSEArca: LOWC) and the iShares MSCI ACWI Low Carbon Target ETF (NYSEArca: CRBN) target the MSCI ACWI Low Carbon Target Index, which tries to address carbon exposure by overweighting companies with low carbon emissions relative to sales and per dollar of market capitalization, compared to the broader market. Both ETFs were created for the U.N. Joint Staff Pension Fund.
More fund sponsors are jumping on the sustainable or ESG investment theme. Recent launches include the Columbia Sustainable U.S. Equity Income ETF (NYSEArca: ESGS), Columbia Sustainable International Equity Income ETF (NYSEArca: ESGN), Columbia Sustainable Global Equity Income ETF (NYSEArca: ESGW), FlexShares STOXX US ESG Impact Index Fund (NasdaqGM: ESG), FlexShares STOXX Global ESG Impact Index Fund (NasdaqGM: ESGG), Oppenheimer ESG Revenue ETF (NYSEArca: ESGL) and Oppenheimer Global ESG Revenue ETF (NYSEArca: ESGF).
For more information on socially responsible investment strategies, visit our socially responsible ETFs category.