Despite political backlash and intensifying regulatory scrutiny, environmental, social, and governance (ESG) strategies remain popular with global asset allocators.
This is good news for ETF issuers. Many have introduced or expanded ESG lineups. For end users, including registered investment advisors and retail investors, straightforward methodologies and ESG credibility are meaningful traits.
Not all ESG ETFs answer those bells. The Calvert US Large-Cap Core Responsible Index ETF (CVLC), Calvert International Responsible Index ETF (CVIE), and the Calvert US Select Equity ETF (NYSE Arca: CVSE) are examples of ETFs that deliver ESG credibility while avoiding controversies such as greenwashing.
The Focus on Greenwashing
A recent survey by Cerulli Associates indicates asset allocators are focused on greenwashing and some market participants’ negative sentiment toward ESG. Most define “greenwashing” as a company overstating sustainability credentials and efforts, a fund bearing the sustainability label with no evidence to support that label, or an investment strategy that purports to emphasize sustainability when it truly does not.
“Asset owners and managers polled by Cerulli during the past year remain focused on ESG initiatives. Even as two valid, existential challenges that threaten the credibility of ESG loom,” notes the research firm. “First, regulatory efforts around the globe to better define and regulate what truly constitutes sustainability objectives in an investment fund, thus mitigating product ‘greenwashing.’ Second is investors’ negative perceptions of ESG fund performance and how firms can better set and achieve expectations for these investments.”
The aforementioned Calvert ETFs offer multiple avenues for avoiding those thorny issues, such as CVSE’s active management. Active oversight can potentially position CVSE to focus on domestic stocks with the best ESG credentials while avoiding “pretenders.”
That’s an important point. This much emphasis on corporate-level ESG adoption exposes companies that merely pay lip service to unwanted controversy. And that’s a downside for investors.
The Good News
There is, however, good news for ESG ETFs, including CVLC, CVIE, and CVSE, which are newer entrants to the fray. As Cerulli notes, negative sentiment isn’t pushing investors away. Market participants that want ESG exposure continue to embrace related strategies and those that don’t simply park their capital elsewhere.
“The challenges firms face in implementing ESG investment initiatives are pain points that will likely be viewed in retrospect as necessary steps in the legitimization and long-term success of these goals. Ultimately, even as firms acknowledge and take measures to quell cynicism, few show signs of being deterred by skeptics or deviating from the courses that have been set,” observed Cerulli.
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