Tech Companies Face ESG Risk, Opportunity | ETF Trends

Many environmental, social, and governance (ESG) exchange traded funds are heavily allocated to growth stocks. As such, those funds typically feature allocations to the technology sector that are well in excess of what’s found in broader market benchmarks. The IQ Candriam ESG US Equity ETF (IQSU) is one such example; IQSU, which tracks the IQ Candriam ESG US Equity Index, devotes 35.2% of its weight to technology stocks.

Throw in a combined 23.5% allocation to consumer discretionary and communication services equities, and it’s fair to say this is a growth-heavy ETF.

Indeed, many technology and communication services companies have legitimate ESG credentials, and many have aced the “E” in the equation. However, as more attention is paid to ESG scoring and ratings, some critics demand more from tech companies, particularly regarding social and governance issues.

“However, as providers benefit from increasing uptake and reliance on such solutions, they must also grapple with myriad social and environmental risks affecting stakeholders. These include data privacy and security issues, product governance considerations, and the growing environmental footprint of cloud computing,” notes Morningstar analyst Emma Williams.

For investors considering an ETF such as IQSU, the positive here is that communications services and technology companies are increasingly aware of the need to bolster social and governance credentials, including safeguarding customer data. As those efforts take shape over the long term, investors could be rewarded.

“Despite these challenges, we don’t think the risks preclude long-term investment in the sector. While investors looking to integrate environmental, social, and governance risk factors into their analysis should consider the valuation implications of these issues, the relative price paid for the stock is also a critical factor,” adds Williams.

As a broad-based ESG ETF that’s overweight technology equities, IQSU has multiple avenues as a potential beneficiary of the sector’s ongoing efforts to improve data security. Some technology companies will benefit from improved data privacy, while others stand to win by providing the products and services necessary to help customers accomplish that objective.

“However, while data breaches and cybersecurity incidents are high-profile, the associated costs are unlikely to make a material dent for highly profitable, well-capitalized companies. In addition, the IBM/Ponemon 2022 Cost of a Data Breach Report shows that 60% of surveyed companies increased prices due to a data breach, implying that most companies typically do not bear the full cost of such incidents,” concludes Morningstar’s Williams.

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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.