Consider Socially Responsible ETF Strategies That Reflect Your Beliefs

As socially responsible investments begin to proliferate and gain wider recognition, exchange traded fund investors should consider these potential opportunities that can help enhance their portfolio.

“You do not have to accept underperformance as a trade-off for incorporating sustainable funds,” Jennifer Tarsney, Director, Practice Management, New York Life Investments, said in the recent webcast, Sustainable Investing for a Sustainable Business. “That is an absolute myth.”

Tarsney pointed out that over a 5-year time frame, 64% of sustainable funds performed in the top half of their categories. Looking at the 1-year and 3-year performances, the number moves closer to 70%. So, they actually overrepresent the top half of all funds. During the 1st quarter, when volatility was at its peak, sustainable funds really outperformed, with 44% in the top quartile – a major overweight.

Meanwhile, investors noticed this growing trend and have funneled record inflows into the ESG category, while many traditional strategies suffered massive outflows. In April 2020, sustainable funds enjoyed their most significant monthly inflows ever, which followed the 1st quarter flows here in the U.S. of $7.3 billion, a quarterly record, and an amount that represented over half of the total flows for all of 2019.

In a recent New York Life Investments survey of affluent investors over the age of 25 with over $250,000 in investable assets, the results showed that an increasing number of younger individuals are becoming more socially conscientious with their investment decisions. For instance, 57% of 25-39-year-olds were aware of ESG fund strategies, and 46% have already invested in them. The younger age group also want their investments to address issues like global warming, climate change, and sustainability. While the younger generation favors more sustainable investments, an overwhelming majority across all age groups also showed openness to the idea.

“We shouldn’t assume that older clients aren’t interested,” Tarsney said. “We asked what products might you be interested in investing in – you can see that one’s focused on the environment rate the highest across all age groups. If you are wondering how to kick off the conversation, suggesting they look at an environment focused solution might be a safe place to start.”

Many are also more prone to actively consider company values when making a purchase. These “values-driven” consumers take action as a result of concerns about issues as they would boycott a brand, divest a portfolio of a company, or changed types of products or used.

“We found that more than half self-identified as values-driven consumers – way more than those who identified as sustainable investors,” Tarsney said.

“When we looked at the data this way, you can see that the age skews older, so it’s not just millennials. Women were more likely to identify as a value-based consumer, but more than 40% of men did also,” she added.

Consequently, Tarsney argued that there is an evolution of a values-based consumer to a values-based investor where an individual who actively chooses to spend on sustainable products become investors in sustainable products.

According to the recent survey, almost 60% feel that it is essential that their portfolio reflects their personal views. They are even willing to give up returns, which we now know is not a necessary trade-off, and they anticipate that their social aspects will impact their future investment decisions.

However, less than half of the participants know how to create a portfolio that reflects their views, potentially opening an opportunity for an advisor to help and the fund industry to provide education. For example, the survey showed that 75% of women have some interest in discussing sustainable investing with an advisor, but only 27% of women are aware of ESG, SRI, or impact investment options.

“What our women participants told us is that they need more knowledge around finances, they want to ask questions, and they are willing to participate in events where they can learn more and get their questions answered. We are seeing tremendous success among advisors who are focusing on hosting women’s educational events,” Tarsney added.

An excellent place to start may be through the European Sustainable Investment Forum (EUROSIF) and used to screen responsible investments. These strategies are core to discussing sustainable investing with your client base. Specifically, the responsible investing strategies and approaches include responsibility themed, best in class, exclusion, engagement and voting, ESG integration, impact investing, and norms-based screening.

Financial advisors who are interested in learning more about sustainable investing can watch the webcast here on demand.