Environmental, social, and governance (ESG) and sustainability are two distinct investing styles, but in the fund universe, including exchange traded funds, the two themes often converse under the umbrella of a single fund.
Take the example of the IQ Candriam ESG US Large Cap Equity ETF (IQSU). IQSU, which follows the IQ Candriam ESG US Equity Index, clearly advertises ESG in its title and the fund lives up to that billing. However, some of the fund’s 344 holdings also offer investors strong sustainability credentials.
In fact, in the eyes of some market observers, some IQSU member firms are among the best companies regarding sustainability resumes. Plus, IQSU does an admirable job of avoiding potential sustainability trouble spots.
“All companies face some sustainability risk, not least because of the industries in which they operate. For example, an oil and gas company will be highly exposed to potential environmental problems, while a consumer technology business will be exposed to social risks like data privacy violations,” writes Morningstar analyst Leslie Norton.
The research firm recently revealed its Best Companies to Own in 2022 list with an ESG lens, and the results turned up some stocks that also reside on IQSU’s roster. That group includes consulting firm Accenture (NYSE: ACN).
“Accenture has the lowest Sustainalytics ESG Risk Rating of all the high-quality companies on our list. The firm’s risk is mainly related to its exposure to cyberattacks and its dependency on specialized talents, such as IT consultants and engineers, as it tries to keep up with client demand,” adds Norton.
Dow components Microsoft (NASDAQ: MSFT), Visa (NYSE: V), Walt Disney (NYSE: DIS), and Cisco Systems (NASDAQ: CSCO), among others, also make the Morningstar list. All four of those stocks are members of the IQSU portfolio.
Another IQSU holding with strong sustainability credentials that some investors may not be familiar with is communications testing and measurement solutions provider Keysight Technologies (NASDAQ: KEYS).
“Because of Keysight’s strong ESG reporting and oversight of ESG issues, Sustainalytics gives the company an ESG Risk Management rating of Strong. Sustainalytics notes that the firm has implemented a strong whistleblower program, has an adequate policy governing environmental issues, and employs solid social supply chain standards,” notes Norton.
Important to the long-term IQSU thesis is that companies prioritizing sustainability today are likely to continue doing so, and that could bolster shareholder outcomes over long time horizons.
“From that perspective, not all the names on this catalog of low-ESG-risk companies with wide moat ratings can be considered a buy at the moment. Still, for investors interested in managing long-term ESG risks, they’re worth keeping a close eye on,” concluded Norton.
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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.