With more scrutiny on environmental, social, and governance (ESG) as a corporate methodology and as an investing style, asset allocators are demanding more action on the social and governance fronts.
As the acronym implies, those are two distinct issues. In many cases, it’s easier for companies to rapidly up governance standards than it is to swiftly convince consumers, employees, fund managers, and retail investors that progress is being made on the social front.
“Social issues are perhaps the most difficult to research and least understood by investors with an environmental, social and governance (ESG) focus. But the risks and opportunities they represent are growing, and investors need a way to step up to the challenge,” according to a recent blog post by the Harvard Law School Forum on corporate governance.
The difficulty in making social and ESG issues approachable for a broad audience of investors underscores the advantages of exchange traded funds such as the Calvert US Large-Cap Diversity, Equity and Inclusion Index ETF (NYSE Arca: CDEI). CDEI is one of just a handful of ETFs with an explicit diversity, equity, and inclusion (DEI) objective.
CDEI’s Methodology Matters
CDEI follows the Calvert US Large-Cap Diversity Research Index. That benchmark’s selection universe starts with the 1,000 domestic companies by market value. From there, DEI criteria pare down the group, and there is allotment for firms that are making notable strides on that front.
That straightforward approach is meaningful at a time when confusion abounds regarding how to adequately gauge publicly traded companies’ progress on social issues.
“Data about social factors are relatively scarce, vague and hard to blend easily into a research and investment process. With social trends and new legislation in the spotlight, investors can’t afford to ignore the risks to companies and investment performance,” added Harvard.
Said another way, there’s more uniformity regarding what constitutes strong environmental and governance policies. Morever, that uniformity transcends sectors. However, various sectors and industries can and do have specific social risk that other groups don’t.
As Harvard noted, predatory lending is a social issue related to the financial services sector, whereas child labor exploitation is a concern in the apparel and industrial spaces, among others. Overall, social issues are gaining more attention among investors. Some expect that trend to remain in place for some time.
For market participants that need more convincing, it cannot be ignored that CDEI’s underlying index modestly outperformed the Russell 1000 over the past three years.
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