Environmental, social and governance, or ESG, investment principles have been gaining increased prominence in recent years with exchange traded funds providers helping increase ESG accessibility to all investors.
The SPDR MSCI ACWI Low Carbon Target ETF (NYSEArca: LOWC) and the iShares MSCI ACWI Low Carbon Target ETF (NYSEArca: CRBN) are two of the more successful ESG ETFs. CRBN and LOWC are up an average of 4.6% this year.
The two ETFs 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.
“The funds are part of a growing move to ESG investing, which stands for “environmental, social, and corporate governance.” Such investments are designed to favor companies with strong track records on ethical and sustainable issues. While the category has been growing in popularity, data remain mixed on whether scoring on such metrics is accurate and can lead to greater results over the long term,” reports Ryan Vlastelica for MarketWatch.
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.
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.
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.
For more information on socially responsible investment strategies, visit our socially responsible ETFs category.