Transparency Matters in ESG Conversation | ETF Trends

A key element in environmental, social, and governance (ESG) applications at the corporate level is how forthright companies are with investors regarding ESG risks.

Thanks to the ARK Transparency ETF (CTRU), investors can efficiently tap into that theme. CTRU isn’t a dedicated ESG exchange traded fund in the traditional sense, but as its name implies, it is dedicated to transparency — a trait that often goes hand-in-hand with companies that score favorably on various ESG metrics.

CTRU, which debuted last December, is relevant today as advisors and investors seek more sophisticated and straightforward approaches to ESG investing.

“It stands to reason that, as companies disclose more environmental and social information (because of mandated disclosure or their own volition), investors may increasingly incorporate this data into the pricing of stocks,” according to Morningstar research. “In addition, consumers may make choices with their dollars that align with their own sustainability preferences.”

The reality is that companies that are vulnerable to ESG risk put shareholders at risk. Markets don’t take kindly to ESG missteps — scenarios that CTRU member firms are less likely to be embroiled in, underscoring the long-term case for the fund.

“Understanding financially material risks that consumer choices, increasing regulation, and scrutiny of management governance practices have on a company’s future cash flows is a prudent part of a holistic investment decision,” adds Morningstar.

For its part, CTRU holds 100 stocks that are equally weighted in the fund. The ARK fund follows the Transparency Index. Members of that index are significantly less likely to commit financial fraud or engage in nefarious environmental practices than competitors.

Those are undoubtedly positive traits and can potentially mean that investors considering CTRU are getting a lower-risk equity portfolio. On that note, it’s important to realize that CTRU is a valid avenue for defraying ESG risk, but investors should dig deeper to assess how components’ ESG efforts work in terms of ESG impact.

“When considering ESG risk specifically, investors focus on potential threats (or opportunities) related to companies’ bottom lines; any consideration of a company’s potential positive impact relates only to the future return on investment it could generate. It’s possible that a company driving positive impact may reap solid returns for doing so, but that fact is not a given,” concludes Morningstar.

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.