ETF Trends CEO Tom Lydon discussed the SPDR S&P 500 ESG ETF (EFIV) on this week’s “ETF of the Week” podcast with Chuck Jaffe on the MoneyLife Show.
The S&P 500 ESG Index is designed to measure the performance of securities meeting certain sustainability criteria (criteria related to ESG factors) while maintaining similar overall industry group weights as the S&P 500 Index.
“There’s no need to sacrifice performance for values,” says Lydon.
Using the S&P 500 ESG Indexing methodology, the customized ESG benchmark excludes sectors involved in tobacco, controversial weapons, thermal coal, low UNGC scores, and the bottom 25% of S&P DJI ESG scoring companies within each global GICS Industry Group. The Index would then sort eligible companies by S&P DJI ESG Score within each GICS Industry Group and select top-performing companies, targeting 75% within each GICS Industry Group.
On the environmental side, the methodology provides exposure to companies that analyze their sources of Scope 3 emissions, third-party verified emission data, and exposure to companies with GHG emission reduction targets. The social aspect covers exposure to companies actively monitoring diversity-related issues; female representation in all management positions including junior, middle, and senior management; and more exposure to companies assessing human rights issues across their business.
Lastly, the governance principle measures exposure to companies that perform and disclose ESG materiality analysis, exposure to companies with a diversity policy regarding board nominations, and exposure to companies with a public Supplier Code of Conduct that covers working conditions.
The result is an ESG Index with sustainable performance with benchmark-like returns similar to the widely observed S&P 500. Specifically, the S&P 500 ESG Index exhibited a 14.05% 10-year annualized return with a 13.07% 10-year standard deviation, compared to the benchmark S&P 500’s 13.74% 10-year annualized return with a 13.25% 10-year standard deviation. The ESG Index is also outperforming this year, showing an 18.09% 1-year return, compared to the S&P 500’s 15.15% 1-year return.
Why the Interest in ESG?
Three major driving trends have helped fuel this growth, including the Great Reset in a turbulent 2020, more informed investors reshaping the investment industry, and the transfer of wealth from Baby Boomers to the younger generation. Looking ahead, Arone projected ESG ETFs and Index mutual funds to attract $1.3 trillion in assets under management by 2030, compared to the current $170 billion in assets now.
According to the U.S. SIF Foundation’s 2020 biennial “Report on US Sustainable and Impact Investing Trends,” sustainable investing assets now total $17.1 trillion or $33% of the $51.4 trillion in total U.S. assets under professional money management, a 42% jump from 2018.
The recent outperformance in the ESG category may have also contributed to the increased interest in this sustainable investment theme. According to a recent Nuveen survey, 53% of respondents cited better returns as their reason for choosing responsible investing, while only 51% were more interested because of this year’s natural disasters.
According to PricewaterhouseCoopers, as much as 57% of mutual fund assets in Europe will be invested in funds that consider environmental, social, and governance factors by 2025, or €7.6 trillion or $8.9 trillion, compared to 15.1% at the end of last year. 77% of institutional investors surveyed by PwC indicated plans to stop buying non-ESG products within the next two years. PwC projects ESG equity funds will experience a compound annual growth rate of 26.8%, with assets quadrupling to over €3.6 trillion by 2025.
Socially Responsible Growth Opportunity?
The World Energy Outlook highlights the long-term growth potential for renewables. The current Stated Policies Scenario shows 80% of the growth in global electricity demand over the next decade to be satisfied by renewables, largely from solar sources, which has become more cost-effective than coal and natural gas-generated electricity in many countries.
This scenario represents the IEA’s most conservative assumptions in the adoption of renewable energy. If we were to meet Paris Agreement standards, annual solar capacity additions for the next decade would have to be four times greater than in 2010 through 2019, and wind additions would be 2.5 times greater.
Listen to the full podcast episode on the EFIV ETF:
For more podcast episodes featuring Tom Lydon, visit our podcasts category.