Deploying ESG to Find Opportunities, Limit Risk | ETF Trends

Despite mounting criticism, environmental, social, and governance (ESG) is an investing style with merits. In fact, as ESG ages and becomes a central part of core portfolios, more benefits are emerging.

Those include the potential for leveraging ESG principles to unearth investment opportunities while possibly limiting risk. Alone, each is compelling. Put them together, and they’re all the more attractive. Over the long term, some exchange traded funds may accomplish those objectives. That group includes the SPDR S&P 500 ESG ETF (EFIV).

In simple terms, EFIV is the ESG answer to traditional S&P 500 ETFs and index funds. As such, it offers investors a broad-based, large-cap approach to ESG investing that can include the aforementioned traits of opportunity and risk reduction. EFIV is also pertinent at a time when more asset allocators and regulators are focusing on social and governance issues.

“S&P Global research has found that poor governance ratings directly correlate with poor investment performance. When corporate governance falters, it can lead to massive financial losses, and even the collapse of entire enterprises,” noted Inogen Alliance.

Prioritizing governance has wide-ranging, long-term implications for investors. While hindsight is always 20/20, analysis confirms that had governance been a bigger priority earlier this century, the severity of the global financial crisis may have been limited.

“These collapses have wide-reaching consequences. Much of the 2008 Great Recession can be pinned on bad governance practices. The resulting housing crises and tight job market left hundreds of thousands of people in dire financial straits, and the markets took nearly two years to recover from the loss,” added Inogen Alliance.

Additionally, social issues are of increasing importance to investors and companies, including some EFIV member firms. In the U.S., companies are being urged to pay more attention to issues ranging from gender pay gaps to diversity, equity, and inclusion (DEI) and more, confirming there could be significant long-term benefits for corporations that enhance social guidelines and visions as well as their investors.

“The measure of an organization’s social responsiveness and social responsibility matter to this generation of consumers and business professionals,” noted Inogen. “When companies make a concerted effort to enact socially beneficial programs within their organization, they let investors know that they are committed to the health and longevity of their workforce.”

A variety of research reports suggest that companies that are more diverse and those prioritizing equal pay and gender diversity in the C-suite often outperform their less diverse rivals.

For more news, information, and analysis, visit the ESG Channel.

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.