Green investing made huge strides last year, but some ESG ETFs are still not materially reducing their carbon footprint, says Jordan Waldrep, CFA, Principal, and CIO of TrueMark Investments.
Waldrep says some ESG ETF holdings are still substantial polluters with a carbon footprint that’s not much lower than that of the S&P 500.
Looking at the recent success of ESG ETFs, when considering why this segment of the industry has been flourishing, as Waldrep explains, “I think that there are several factors that are playing into the “moment” ESG has had over the past year. First of all, the demographics of investors are changing. The average Millennial is over 30 now and as old as 38. They are starting to make up a significant portion of the investing community, and they are far more likely to invest with impact or ESG principles than boomers or Gen X.”
He continues, “Second, there have been some fairly well-publicized corporate commitments to aspects of ESG and ESG overall. You have Microsoft, Apple, Google, and Facebook committing to becoming varying degrees of 100% renewable or carbon-neutral while BlackRock publicly committed to supporting ESG investing.”
“Finally, you had an election in which the new president, congress, and senate will all be supporting green initiatives to the tune of trillions of dollars. That kind of government investment can reshape the economy, especially when it is accelerating cost and investment trends that are already succeeding.”
ESG Outlook: The Long & the Short of it
When considering the outlook on ESG investing in general, both in the short- and long-term, Waldrep states how, “Short term, we expect a continued stream of good news on the ESG front. We view ESG as a way to assess risks that may not be directly on the income statement or balance sheet of a company. Disruption from decarbonization, diverse management that can compete in a global economy, good governance that protects stakeholders, etc.”
Waldrep continues, “One of those risks is a regulatory action, and we expect the new administration to push regulatory aspects to improve company behavior in many areas that may have been ignored under the last administration. As such, companies addressing these issues well should face more limited regulatory disruption and be more successful.”
As for the long-term, Waldrep notes, “We see the application of ESG as a natural standard for companies. In 10 years, the entire S&P 500 will have great ESG scores because consumers, investors, and governments will demand that these issues are addressed. In the meantime, the companies that are DRIVING these changes will have tremendous opportunity to grow and disrupt markets. So over time, we expect there to be significant growth in ESG overall and the companies that are leading the change.”
Leave a Larger Footprint
As far as what sectors make sense to highlight when it comes to which could be adding a stronger focus on ESG, as Waldrep explains, “ESG is a major factor in how companies are addressing issues, so we see it across sectors and industries. That said, it is important to recognize that different companies have different areas of focus. I’m less concerned about the carbon emissions of JP Morgan as I am with Governance. I’m not concerned about the Social aspect of NextEra Utility as I am about their long term trend to address GHG. ESG isn’t as simple as just applying a set of rules to a company. It is about thoughtfully planning for the economy of tomorrow.”
Now, with the economy in recovery, in regards to what can be done to either spotlight the lack of ESG ETF impact, or move things in a different direction, Waldrep believes, “Investment in a company only allows you to vote proxies. We can invest in the companies we feel are preparing for tomorrow to generate better returns for our investors. We can vote for proxies and management teams that support these ideas.”
He continues, “At the moment, there is urgency in these ideas, particularly on the environmental front, but we cannot practically change the economy overnight. This is a marathon, not a sprint with new ideas and innovations pushing us forward. As we look forward we must work is to continually increase awareness of these factors and the risks they represent to companies and ultimately investors.”
Waldrep highlighted its ESG Active Opportunities ETF (ECOZ) that has been making significant strides.
“ECOZ is unique,” he said. “It is a diversified portfolio of 70-80 names representing an 80% reduction in carbon intensity compared to the S&P 500. Our portfolio is basically meeting the Paris Accords Climate goals of 2050 today with a diverse portfolio of equities today. ECOZ is designed to reflect what we think the economy of 10 or 20 years will look like led by ESG Champions that we see leading the change in energy sources, electrification, access to financial services, how we work, and a few other themes that we see driving innovation.”
For more information, visit https://truesharesetfs.com/ecoz.
For more market trends, visit ETF Trends.