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.
“As long as investors can effectively identify ESG considerations that are materially important for a company and make investment decisions accordingly, they can uncover risks and opportunities that markets have not yet valued and that are not captured in conventional funds,” French said.
ESG investing is a type of “sustainable investing,” which try to seek positive returns while also considering and evaluating the long-term impact business practices have on society, the environment and the performance of the business itself.
The environmental factor refers to how company sources its raw materials, how much waste it produces in operations, how waste is disposed of and whether its product packaging is disposable, along with positive contributions with initiatives like clean technology or construction of green buildings.
The social aspect refers to how companies deploy their human capital. Labor management practices are assessed, along with the health and safety of workers, and impact of products and services on customers.
Lastly, the governance component makes up how well a company manages itself. Executive compensation is a key part. A history of corruption will bring down the score while strong ethics is a big plus. Rights of shareholders are also considered.
Financial advisors who want to view the full interview can watch the video on demand on the ETF Trends Virtual Summit.