Long-term investors may do well by incorporating exchange traded funds that target environmental, social, and governance principles into a diversified retirement portfolio.
The U.S. Department of Labor has discouraged the consideration of environmental, social, and governance issues for pension plans subject to the Employee Retirement Income Security Act (ERISA). However, State Street Global Advisors argues that the Department’s stance runs counter to its commitment to the long-term financial interests of millions of Americans saving for retirement.
“We believe that appropriately integrating ESG adds value and constraining consideration of these material issues for ERISA plan strategies runs contrary to the DOL’s stated objective of focusing on financial factors that affect investment returns for plan participants. In an uncertain world in which ESG matters more, not less, to strong corporate resiliency and sustainable performance, promoting material ESG considerations in investment decision-making is good for the long-term retirement security of millions of American savers,” SSGA strategists, led by Cyrus Taraporevala, the president and chief executive officer of State Street Global Advisors, said in a note.
ESG fund strategies are seen as one investment tool that are part of money managers’ fiduciary duty to maximize the probability of attractive long-term returns.
State Street argued that it is also important to distinguish between strategies that align with an investor’s ESG preferences and explicitly prioritize impact over returns, or “values-driven investing”, and “value-driven” ESG investing that incorporates analysis of material ESG risks and opportunities in the same way that traditional financial metrics are considered.
Stock prices have reflected investor awareness of the financial impact of positive ESG characteristics, especially during periods of economic and financial stress when business model resiliency stands out. For example, stronger cash flows, lower borrowing costs, and higher valuations are common factors among companies focused on managing material ESG risks.
As a way to better help investors captures these ESG principles, State Street Global Advisors has come out with a handful of ESG or socially responsible ETF strategies. For example, more recently launched SPDR S&P 500 ESG ETF (EFIV) enhances both SPDR’s ESG and S&P 500 ETF offerings, helping investors incorporate ESG while achieving a risk and return profile comparable to the S&P 500. The ETF tracks the S&P 500 ESG Index, which is designed to measure the performance of securities meeting certain sustainability criteria (i.e., criteria related to environmental, social and governance factors), while maintaining a similar overall industry group weight as the S&P 500 Index.
Additionally, the SPDR MSCI ACWI Low Carbon Target ETF (NYSEArca: LOWC) targets the MSCI ACWI Low Carbon Target Index, which tries to address carbon exposure by overweighting companies with low carbon emissions relative to sales and per dollar of market capitalization, compared to the broader market. LOWC was created for the U.N. Joint Staff Pension Fund.