Environmental, social, and governance (ESG) investing and the related exchange traded funds are enduring plenty of criticism — some of it pent-up — but that doesn’t mean this style of investing is doomed.
In fact, some experts argue that ESG, both the investing style and ETFs such as the IQ Candriam ESG US Equity ETF (IQSU), remain positioned for long-term success. It’s not an unreasonable assertion. After all, one of the primary reasons that ESG ETFs are faltering this year is because growth stocks are doing the same. Many ESG funds are growth-heavy and lack the value heft necessary to capitalize when the latter factor is recovering.
Another issue confounding funds such as IQSU this year is the fact that commentary surrounding the ESG space is dour. Neither the influx of negative headlines nor the sub-par performances of growth stocks will be permanent conditions.
“The environmental, social, and governance (ESG) investment community is deep within the third stage. ESG investing has been subjected to brutal headlines, politically motivated attacks and editorials from many market and political pundits in investment news outlets such as the Wall Street Journal, Barron’s, The Economist, the Financial Times and others over the first half of the year,” wrote Riverwater Partners analyst Connor Doak.
As Doak noted, there’s still some confusion surrounding ESG ratings. That can be off-putting to asset allocators, but it underscores the benefits of easy-to-comprehend approaches in the space, such as what’s put forth by IQSU.
“These conflicting standards lead to confusion amongst investors, which is why many firms use a ‘materiality framework’ and weigh the different ESG criteria based on their importance to financial performance for that industry and company,” added the analyst. “Interestingly, many companies have already enacted these practices into their business without any government mandate or investor pressure. Management teams have taken the initiative because they recognize the impact these non-financial risks can have on their business.”
As noted above, another reason that ESG ETFs are enduring heavy criticism this year boils down to sheer performance. However, investors should note that judging an investing style’s returns based on several months or even a year of performance data isn’t always instructive.
“While some of that underperformance appears to be turning around, six or 12 months is too short a time frame to judge performance. You need data from multiple years to reach a conclusion that an investment strategy has merit or that a particular style can work in different market environments,” concluded Doak.
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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.