As more professional money managers and retail investors embrace environmental, social, and governance (ESG) investing, this style is moving well into the mainstream and becoming a relevant core consideration. That’s good news for straightforward ESG exchange traded funds such as the SPDR S&P 500 ESG ETF (EFIV).
“Environmental, Social, and Governance (ESG) has been a growing focus for Asset Managers over the past few years going quickly from Alternative data to Essential in the overall investment process. The continued appetite from investors and a changing regulatory landscape have all contributed to estimates that ESG will surpass $41 trillion in 2022 and $50 trillion by 2025,” according to FactSet.
EFIV follows the S&P 500 ESG Index, which is the ESG offshoot of the traditional S&P 500. One way of looking at EFIV’s index lineage is that it confirms the ETF’s viability as a core holding that long-term investors can comfortably embrace.
EFIV is also relevant at a time when regulators around the world are taking more intense looks at exactly what constitutes “ESG.” Said differently, EFIV credibly avoids greenwashing — a notion cemented by the fact that the members of the S&P 500 that don’t make the cut for entry into the ETF are among the names that could be ESG offenders.
“The SEC’s definition of ESG-Focused Funds cleanly delineates between funds that use one or more ESG factors as a significant or main consideration 1) in selecting investments or 2) in their engagement strategy with the companies in which they invest. The use of the conjunction ‘or’ in this sentence differentiates the SEC’s approach from most approaches in which engagement is one component of a broader ESG investing strategy rather than the whole strategy,” added FactSet.
For professional money managers, including registered investment advisors (RIAs), EFIV’s DNA, cost efficiency, favorable expense ratio, and the tax benefits offered by ETFs are among the factors that could increase engagement with the fund over the long term. Those are relevant traits today, too.
“As with any disclosure regulation, the regulation of ESG engagement disclosures activates a host of operational and compliance requirements peripheral to disclosure itself—from policies and procedures to controls, communications (internal, client, and stakeholder), data management, and record-keeping. In short, while the SEC fund ESG proposal allows engagement as a freestanding ESG investment strategy, regulation increases the need for systems that enable the strategy to be pursued efficiently and consistently at scale,” concluded FactSet.
For more news, information, and strategy, 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.