Environmental, social, and governance (ESG) investing remained in focus in 2022, and one reason for the extension of the trend is that this style of market participation is, increasingly, a point of emphasis for regulators.
The good news is that isn’t a negative for investors. Enhanced regulatory protocols could serve a positive long-term aim of bringing clarity to ESG definitions while preventing companies and fund issuers from engaging in inaccurate branding.
Bolstered ESG regulatory efforts can also call attention to the benefits of straight-forward ESG exchange traded funds, such as the SPDR S&P 500 ESG ETF (EFIV). EFIV’s elegant simplicity is pertinent at a time when exactly what it means to be ESG is under the proverbial microscope.
“A large and growing machinery is providing structure around ESG ratings. There’s a burgeoning global standard for sustainability — i.e., what companies must (or should) report about how societal issues impact their business,” reported the Harvard Business Review.
EFIV follows the S&P 500 ESG Index, which, as its name implies, is the ESG offshoot of the standard S&P 500. Alone, that’s a benefit and a selling point to investors. However, there’s more to the story and it could bode well for long-term adoption of EFIV.
“Clear definitions are hard to come by, and those questions investors ask companies to rate them are all over the map. This is somewhat expected. After all, the three main financial documents we all work from today — balance sheet, income statement, and cash flow statement — took centuries to evolve,” according to Harvard Business Review.
Another benefit offered by EFIV is that its methodology is transparent — a growing point of emphasis in the space. That’s not to say some ESG ETFs are intentionally opaque, but there’s plenty of room for improvement on the transparency front. Enhanced transparency could serve multiple ends, including increased adoption of related ETFs and keeping regulators off fund issuers’ backs.
“Regulatory transparency is also accelerating. Switzerland announced it will mandate climate disclosures for large companies starting in 2024 (thus the need for those standards). And the U.S. Securities and Exchange Commission proposed new reporting requirements as well. Companies will need to measure and publish their carbon emissions, both Scope 1 (onsite emissions) and Scope 2 (emissions from electricity bought from the grid),” noted Harvard Business Review.
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.