An ETF trend that is likely to continue will be the rise of environmental, social and governance (ESG) funds given the way they have been growing as of late. Based on Morningstar data via a CNBC report, ESG received about $20.6 billion in investor capital—almost four times the amount received in the year prior—not too shabby.
Furthermore, Bank of America is estimating that in the next 20 years, ESG could take in over $20 trillion as the focus on climate change heightens. Of course, that kind of exponential growth will draw the scrutiny of regulators like the Securities Exchange Commission (SEC).
ESG is now drawing the attention of the SEC just as the topic became one of the most searched financial terms in 2019, according to a 401(k) Specialist post. Now that the ESG space is gaining traction, the SEC is putting the industry under the proverbial microscope with the issuance of examination letters to various firms.
According to the 401(k) Specialist post, the examination letter asked one asset manager for a list of stocks that comprised the fund and how it determines whether an investment is deemed socially responsible.
“The SEC initiative is based out of the agency’s Los Angeles office,” said a Wall Street Journal report. “It has focused on advisers’ criteria for determining an investment to be socially responsible and their methodology for applying those criteria and making investments.”
The news comes just as ESG is starting to make an impact in the investment arena and more interest in 2020 should follow. The challenge for these ESG funds is giving investors what they want, which is more ESG offerings, but at the same time, trying to generate a return.
“It seems to be like 2020 is shaping up to be the year of resource misallocation in the name of — but not actually—saving the climate,” said SEC Commissioner Hester Peirce in a phone interview with CNBC. “If we really want to save the climate, we would allow capital to flow to technologies to solve those problems. That doesn’t involve putting artificial constraints on where capital flows, which some of this trend will do.”
At some point, investor scrutiny will also match regulators and ETF providers will need to be more clear on what their ESG products offer.
“ESG is inclusive — it helps better measure both performance, but also the future potential of different investments through a lens that’s not purely financial,” said Bruno Sarda, the North American president for nonprofit organization CDP. “Climate change has such strong linkage to financial and operational performance that it needs to move beyond a pure ESG definition.”
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