The financial industry is already jumping on the increased demand, with socially conscious mutual funds and ETFs now represented by 145 and 26 funds respectively, with $147.2 billion and $3.5 billion in assets, respectively. This rising investment theme may help investors capture the untapped potential of socially responsible investments while still diversifying and generating alpha within their portfolios.
“ESG issues are not widely understood or quickly incorporated into stocks prices, thus creating a clear opening for alpha generation if investors can effectively identify ESG factors that are materially important for a company and make investment decisions accordingly,” French said.
Laura Nishikawa, Head of Fixed Income in ESG Research at MSCI, helped outline why ESG matters and helped investors hone in on factors to consider. For instance, Nishikawa pointed out that academic studies showed poor ESG performers have exhibited higher cost of capital, higher volatility and accounting irregularities and performances. Consequently, investors may improve their outcome by managing ESG exposures.
“Managing ESG risks was associated with outperformance but only some ESG information was found to be financially relevant,” Nishikawa said.
Consequently, MSCI has developed its own ESG rating system to seperate the wheat from chaff. For instance, under the environment category, the indexer focused on climate change, natural capital, pollution & waste and environmental opportunities. The social category covers human capital, product liability, stakeholder opposition and social opportunities. Lastly, the governance category includes corporate governance and corporate behavior.
Investors who are interested in this refined approach to ESG investments can take a look at Oppenheimer ESG Revenue ETF (NYSEArca: ESGL) and Oppenheimer Global ESG Revenue ETF (NYSEArca: ESGF).
Specifically, 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.
Mo Haghbin, Head of Product and Beta Solutions at OppenheimerFunds, pointed out that 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.
Financial advisors who are interested in learning more about environmental, social and governance-related investments and the rising influence of millennial investors can watch the webcast here on demand.