As an investing style, environmental, social, and governance (ESG) is drawing more devotees and more scrutiny. The same is true at the corporate level as a growing number of companies pledge to embrace ESG principles.
Don’t expect corporate America to swiftly reverse course on ESG — not with the investment community demanding greater attention to ESG detail, and not with younger demographics increasingly investing and shopping along values-driven lines. These trends could be long-term positives for exchange traded funds such as the SPDR S&P ESG ETF (EFIV).
EFIV, which tracks the S&P 500 ESG Index, is a relevant consideration among ESG ETFs because, for one reason, it offers depth. Depth is important at a time when more and more companies are looking to bolster ESG credentials.
“Across industries, geographies, and company sizes, organizations have been allocating more resources toward improving ESG. More than 90 percent of S&P 500 companies now publish ESG reports in some form, as do approximately 70 percent of Russell 1000 companies,” according to a McKinsey ESG report.
EFIV answers that bell because the ETF holds 307 stocks with sector allocations — all 11 — that are comparable to those found in a standard S&P 500 ETF or index fund.
That depth could be one reason that EFIV has been a success story among ESG ETFs. EFIV turned two years old last month and already has $517.3 million in assets under management, confirming it is benefiting from a multi-year trend of market participants putting capital to work with ESG ETFs.
“The rising profile of ESG has also been plainly evident in investments, even while the rate of new investments has recently been falling. Inflows into sustainable funds, for example, rose from $5 billion in 2018 to more than $50 billion in 2020—and then to nearly $70 billion in 2021; these funds gained $87 billion of net new money in the first quarter of 2022, followed by $33 billion in the second quarter,” added McKinsey.
EFIV’s breadth is important for another reason — one that has important long-term implications. Companies, including plenty residing in this ETF, are increasing their emphasis on social and governance matters.
“A major part of ESG growth has been driven by the environmental component of ESG and responses to climate change. But other components of ESG, in particular the social dimension, have also been gaining prominence. One analysis found that social-related shareholder proposals rose 37 percent in the 2021 proxy season compared with the previous year,” concluded McKinsey.
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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.