Understanding ESG ETF Investments

Exchange traded funds that track companies adhering to environmental, social and governance principles help investors align their personal values with their financial goals while potentially enhancing an investment portfolio and better manage risks.

On the annual online ETF Trends Virtual Summit, sponsored by OppenheimerFunds, Sharon French, Executive Vice President and Head of Beta Solutions at OppenheimerFunds, spoke with Tom Lydon, publisher of ETF Trends, about Opennehimer’s adventure into the ETF space and their recent ETF additions that help investors track U.S. and global companies with strong ESG attributes.

Investors can take a look at the Oppenheimer ESG Revenue ETF (NYSEArca: ESGL) and Oppenheimer Global ESG Revenue ETF (NYSEArca: ESGF).

ESGL targets broad U.S. large-caps through the S&P 500 but screens through Sustainalyics’ proprietary scoring system that focuses on those with positive ESG attributes and employs a revenue-weighted methodology.

ESGF, on the other hand, takes a global approach. The ETF tries to outperform the MSCI All Country World Index with strong ESG practices and re-weights companies based on revenue earned. MSCI ESG Research utilizes a proprietary ESG scoring system and screens companies based on Sharpe Ratio, a measure of risk-adjusted performance.

“Investing in vehicles focused on sustainability usually met — and often exceeded — the performance of comparable traditional investments,” French said in a note. “This better performance occurred both on an absolute and risk-adjusted basis, across asset classes and over time.”

Research has suggested that capital markets are efficient because of the rich financial information available and would therefore limit opportunities to generate alpha or outperformance. ESG, on the other hand, are not as widely understood or quickly incorporated into stock picking, so the inefficiency creates opportunity for investors to generate alpha.