What Lurks Beneath the Shifting Tides of ESG Investing | ETF Trends

Environmental, social, and governance (ESG) investing has grown to a point that it seems to be an inevitable tide, poised to sweep across industries as the country and world look to find ways to operate in sustainable, conscientious ways. However, with no current federal standards for ESG data and reporting, it is vital that investors and advisors look beneath the surface to understand the full picture of a company’s practices.

Steven Fox, CEO and founder of Veracity Worldwide, spoke to Yahoo Finance at the 2021 Concordia Summit and explained that in the U.S., “we would say in the last 18 to 24 months, there’s suddenly been a sea change among U.S. companies with a real interest in ESG issues.”

While this has been a turning point for many sectors, what companies should report for ESG metrics still remains an unregulated, poorly defined space, especially when it comes to ensuring that they are reporting the whole picture. This could be changing soon, with the SEC having turned its focus to these company reports, but as of yet there are no regulations.

For now, investors are stuck relying on voluntary disclosures with convoluted ranking systems that are applied in different ways to different data across different sectors. It’s important to consider that to understand the whole picture of a company, investors and advisors must be willing to put in the time to do good research into a company’s practices and reporting.

“It’s what we would call ESG intelligence as opposed to just having ESG rankings,” Fox explained. “Can you really get down to the heart and the core and ask penetrating questions and truly understand what’s happening in a company precisely to avoid those greenwashing type of situations?”

Greenwashing is what happens when a company portrays themselves as more environmentally friendly than they actually are, typically when they neglect to be forthcoming about all of their practices, or those of their subsidiaries. Fox explained that it was something that happened with Wirecard, a financial services company that had purported themselves to be ESG-friendly but ultimately was accused of fraud.

It’s not something that Fox sees very often, though, as the industry tends to be fairly honest and very careful about their reporting, given the current hyper-focus by the public and investors on ESG.

“There is a higher degree of self-policing… where companies are worried about being called out if they make a statement that proves not to be correct, and as a result, they want to make sure that their own house is in order before providing information to the ranking agencies,” Fox said.

Putnam Not Only Does the Research but Engages With Companies on ESG

Putnam believes in sustainability and holds ESG practices as a core aspect of its investment approach as ESG becomes an increasing focus for investors, as reflected in the TRS pension fund addition. It’s a trend that is playing out across all sectors and industries, as well as all manner of investment funds.

Putnam’s ESG-focused active sustainability managers are a fundamental part of its work to align shareholder ESG values with investment practices by engaging directly with the companies invested in as to their ESG fundamentals and practices.

The Putnam Sustainable Leaders ETF (PLDR) invests in companies whose focus on ESG issues goes well beyond just basic compliance and for whom ESG is an integral part of their long-term success. These companies have transparent goals and provide consistent, measurable progress updates.

As a semi-transparent fund using the Fidelity model, PLDR does not disclose its current holdings on a daily basis. Instead, it publishes a tracking basket of previously disclosed holdings, liquid ETFs that mirror the portfolio’s investment strategy, and cash and cash equivalents. The tracking portfolio is designed to closely track the actual fund portfolio’s overall performance, and actual portfolio reports are released monthly.

Holdings as of the end of August included Microsoft Corp. at 8.28%, Apple at 7.38%, and Amazon.com at 5.01%. The fund was heavily allocated to information technology stocks (32.41%), followed by healthcare at 15.91%, and consumer discretionary at 14.61%.

PLDR has an expense ratio of 0.59% and has 60 holdings as of the end of August.

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