Investors who are interested in environmental, social, and governance investment strategies can take a look at several actively managed exchange traded funds to meet the growing demand for environmental consciousness and sustainability in both fixed income and equities.
In the recent webcast, The Active Advantage For Environmentally Conscious ETF Strategies, Matthew Camuso, ETF strategist at BNY Mellon Investment Management, argued that responsible investment strategies seek to protect returns against ESG-related risks. For instance, Camuso highlighted that companies with ESG standards also exhibit the ability to focus on best practice standards, attract and retain employees, and provide insurance against potential crises, reputation risk, and costly regulation.
“We believe that ESG is consistent with improved profit,” Camuso said.
Additionally, Camuso contended that a larger share of company value is in intangibles, with less tolerance for corporate incidents and elevated reputational risk.
“We believe that traditional financial metrics fail to capture the full picture,” Camuso added.
Looking ahead, Camuso said that there will be increased interest in ESG credit strategies as ESG factors can play an important role in effective risk management and the investment community is held accountable by the stronger regulatory framework.
To help investors better understand the types of responsible investment approaches, Jennifer Law, head of stewardship at Newton Investment Management, pointed to four distinct categories, including integrated, sustainable, screened, and thematic socially responsible investments.
Integrated covers material ESG issues considered in the investment process. Engagement used to support better investment outcomes with no specific exclusions are applied. It may also invest in securities with ESG risks if valuations reflect that risk.
Sustainability has a greater emphasis on positive societal outcomes as part of the investment case, with a balanced outcome across stakeholders. It provides clear red lines that seek to avoid activities that do significant harm and omits securities with positive short-term prospects, but negative ESG profiles.
The screening process will exclude sectors based on clients’ values and aligns investors’ investments with those values, helping clients achieve their objectives, but it can reduce the investment opportunity set.
Lastly, the thematic approach includes sustainable thematic solutions associated with a specified investment theme focused on long-term secular growth opportunities to match investors’ strategic priorities.
Erin Spalsbury, senior portfolio manager at Insight Investment, also explained Insight’s active methodology can provide exposure to ESG-related fixed-income markets through a blended data score beyond traditional benchmarks as a way to improve credit exposure through active engagement.
Insight’s robust investment process incorporates a “units of risk” budgeting system and a “landmine checklist.” Their global team seeks to ensure top-tier access to market opportunities through a combination of top-down and bottom-up investment styles. Their strategy includes an investment-grade focus with risk and return driven by credit decisions. The management style also focuses on an A+ rating for ESG integration from United Nations Principles for Responsible Investment, along with a proprietary ESG rating and data architecture.
Fixed-income investors can access Insight’s ESG methodology through the BNY Mellon Responsible Horizons Corporate Bond ETF (RHCB). The fund seeks a total return consisting of capital appreciation and income and may be appropriate for investors looking for a fund that primarily invests in securities issued by companies that demonstrate attractive investment attributes and attractive business practices based on an environmental, social, and governance (ESG) methodology. The ETF seeks to emphasize what Insight believes to be the best performers on ESG issues, avoid the worst ones, and carefully consider the approach taken to investments in environmentally sensitive industries.
Law explained that Newton has a long track record of developing responsible investing and ESG solutions. Newton Investment Management Ltd has been proxy voting since the 1970s and employed responsible investment analysts since the 1990s — long before it became mainstream. It has been a signatory of the UN Principles of Responsible Investment since 2007 and joined the Net Zero Asset Managers initiative in March 2021, demonstrating its commitment to working with clients to help fulfill net-zero ambitions and to navigate portfolios through complex energy transitions. Newton currently manages sustainable investments across equity, fixed income, equity opportunities, equity income, multi-asset, and real return strategies.
“Our purpose at Newton is to improve people’s lives through active, thematic and engaged investment which strives to deliver attractive outcomes to our clients and to help foster a healthy and vibrant world for all,” according to Newton.
Newton Investment Management Limited acts as the sub-advisor for the BNY Mellon Sustainable US Equity ETF (BKUS), the BNY Mellon Sustainable International Equity ETF (BKIS), and the BNY Mellon Sustainable Global Emerging Markets ETF (BKES). The three ETFs in this suite are designed to deliver a range of solutions to investors seeking long-term growth potential, with options for exposure to U.S. domestic portfolios and international and emerging markets.
“We believe that taking ESG factors into account where appropriate and as applicable can lead to better investment decisions. While ESG considerations are heavily weighed, companies must also provide long-term thematic, fundamental, and valuation opportunities to be considered,” Law said.
Financial advisors who are interested in learning more about environmentally conscious ETF strategies can watch the webcast here on demand