Environmental, social, and governance (ESG) exchange traded funds have captive audiences among registered investment advisors and retail investors. They have also proven adept at attracting assets. However, considerable debate remains around ESG rankings and scoring.
There are inklings that this scenario is improving. That could broaden the audience for ETFs such as the Invesco ESG Nasdaq 100 ETF (QQMG) and the Invesco ESG NASDAQ Next Gen 100 ETF (QQJG). A primary driver of improving ESG scoring and articulating to end users the benefits of this investing style is big ESG data.
“In order to gain a deeper, more sophisticated understanding of ESG-related alpha drivers, investors are increasingly leveraging big data and artificial intelligence for ESG information collection and analysis. While ESG scores provide a static view, alternative data provides more dimensions of insight. Technology and innovation are becoming key to successful sustainability investing,” according to BlackRock research.
That’s encouraging because it implies that disruptive technologies, such as artificial intelligence and big data, can demystify ESG rankings and potentially make ETFs such as QQJG and QQMG more approachable to a large audience of market participants.
Why It’s Important
Leveraging big data serves another objective: It can demonstrate the financial benefits of corporations evaluating internal ESG strategies. Over the long term, that can create value for a variety of stakeholders.
“ESG-related data also provides a distinct way to capture how companies, within each sector and industry, are innovating and adapting to thrive as the economy transitions to carbon neutrality. This is just one of the many powerful alpha opportunities that can be uncovered with ESG data analysis,” added BlackRock.
Specific to QQJG and QQMG, each of the two Invesco ETFs already features an element of ESG risk scoring. The funds naturally exclude companies from predictable industries, such as adult entertainment, alcohol, and tobacco, among others. In addition to this, prospective additions to the funds’ underlying indexes must fulfill requirements set forth by an “ESG Risk Rating Score.”
The point is that by leveraging ESG scoring that rests on a solid foundation, advisors and investors can accrue long-term benefits.
“Sustainable investing is not just about investing in companies the promote the best environmental, societal, and governance outcomes. Rather, looking at the investment universe from the lens of an ESG prism gives investors an even more comprehensive framework for how to identify companies that are best positioned for future long-term profitability, and hence, alpha opportunities for investors,” concluded BlackRock.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.