ESG Investing With a Revenue-Weighted Kicker

In the realm of smart beta, one of the fastest-growing concepts is environmental, social and governance (ESG) investing. Among the ETFs that marry smart beta concepts and ESG principles is the Oppenheimer Global ESG Revenue ETF (NYSEArca: ESGF).

ESGF tries to outperform the MSCI All Country World Index with strong ESG practices and re-weights companies based on revenue earned. MSCI ESG Research utilizes a proprietary ESG scoring system and screens companies based on Sharpe Ratio, a measure of risk-adjusted performance.

The rules-based indexing methodology tries to improve their performance return through weighting each security in the index by top line revenue. Components are then rebalanced every quarter to keep the Revenue Weighted Indices in line with the companies’ most recently reported revenue levels.

ESGF, which debuted 13 months ago, is up nearly 24% year-to-date. The ETF allocates 29.2% of its weight to the U.S. followed by a 14.4% weight to Japan, one of the most attractively valued developed markets. France and Germany, the Eurozone’s two largest economies, combine for 17.7% of ESGF’s roster. Emerging markets account for 11.5% of ESGF’s geographic exposure.

Recent academic research has shown that high ESG ratings are correlated with lower cost of capital, market-based outperformance and accounting-based outperformance. Harvard Business School discovered that “high sustainability” firms outperform “low sustainability” firms over the long haul with lower volatility.