Growth and adoption of environmental, social, and governance (ESG) investing strategies, including exchange traded funds, isn’t up for debate. However, if those encouraging trends are to continue, index providers and fund sponsors will need to make clarity and simplicity top priorities.
Some ESG ETFs are already doing that. For example, there’s the SPDR MSCI ACWI Low Carbon Target ETF (LOWC). The $104.38 million LOWC offers a straightforward, easy-to-understand approach, confirming its relevance in today’s ESG investing environment.
“Only 23 percent of investors are satisfied with the index they’re using, according to findings from a GaiaLens survey of 200 of the largest asset owners in the U.S. and Europe that were exclusively provided to Institutional Investor. Among respondents, the most commonly used indexes, in order, were the Global Reporting Initiative Standards, the United Nations 17 Sustainable Development Goals, and the Task Force on Climate-Related Financial Disclosures (TCFD),” reports Jessica Hamlin for Institutional Investor.
LOWC, which debuted in November 2014, follows the MSCI ACWI Low Carbon Target Index. The objective of that index is simple. It takes components from the MSCI ACWI Index and overweights those with “low carbon emissions relative to sales and per dollar of market capitalization.”
By allocating a combined 38% of its weight to tech and financial services stocks, LOWC mostly steer clears of companies that could be carbon emissions offenders, providing advisors with an easily conveyed methodology in the process. That’s important because money managers are griping about ESG ratings and scoring.
“Twenty-eight percent of asset owner respondents attributed their discontent with their current ESG reporting frameworks to a lack of clarity, transparency, and robustness in the methodologies used by the providers,” according to Institutional Investor.
Importantly, LOWC answers the all-important question about performance and whether or not embracing ESG principles means sacrificing returns. Over the past three years, the fund slightly beat the MSCI ACWI Index while sporting comparable annualized volatility. Past performance doesn’t guarantee future returns, but LOWC’s track record is relevant because many money managers are still apprehensive about ESG returns.
“Additionally, skepticism about the ability of ESG indexes and funds to generate alpha plays a large part in the slower rates of adoption. Thirty-three percent of U.S.-based respondents, for example, said they believed that ESG was negatively impacting returns, while 17 percent of European respondents said the same,” concludes Institutional Investor.
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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.