How ESG Can Get Its Groove Back | ETF Trends

It feels like only yesterday that ESG investing and related ETFs were the proverbial toasts of the investment community.

Then In 2022, the Federal Reserve started interest rate tightening. That weighed on growth stocks – the cornerstones of many ESG ETFs. It also elevated political scrutiny of this investing concept. Those factors have been a toxic brew of sorts for ESG and arguably stoked some fatigue.

However, many advisors and investors remain committed to the environmental, social and governance concept. This indicates there’s plenty of room for ETFs, including the Calvert US Large-Cap Core Responsible Index ETF (CVLC) and the Calvert US Select Equity ETF (NYSE Arca: CVSE), to blossom over the long term. The return of more sensibility to environmental, social, and governance investing could foster that growth.

‘The Conceptual Error at the Heart of Current ESG Frameworks’

Common sense and emphasizing values-based investing could be what ETFs such as CVLC and CVSE need for long-term growth. A case for those factors is made by Michael Goldhaber, senior research scholar at NYU Stern Center for Business and Human Rights, in a new report titled Making ESG real: A return to values-driven investing.

The conceptual error at the heart of current ESG frameworks is that they measure how environmental and social risks may harm shareholders, rather than how business may harm the world. We show how this misconception developed historically and unpack the three reasons that it’s misguided. First, firms often take actions that harm society without shareholders suffering consequences,” according to the report.

Goldhaber noted that, oftentimes, the “E” and the “S” in the term are in conflict with one another. For investors, that’s a relevant concern, and one that can potentially be allayed by actively managed strategies such as CVSE.

He observed that many corporations making ESG claims tie those efforts to financial performance. That in turn can be misleading to investors. The author also makes the case for clarity and enhanced regulations. Fortunately, CVSE and CVLC are transparent strategies at a time when advisors and investors are demanding more transparency.

“To improve the current ESG investing system, regulators need to require financial services firms to be more transparent about their ESG methodologies and force companies to report more extensive ESG data. The Securities and Exchange Commission is already cracking down on misleading ESG labeling (sometimes known as greenwashing), and is poised to propose a new rule on ‘human capital’ reporting,” concluded Goldhaber.

For more news, information, and analysis, visit the Responsible Investing Channel.