“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.