These days, there’s no shortage of criticism and skepticism aimed at environmental, social and governance (ESG) investing. Owing to greenwashing and lack of clarity on ESG scoring, some of the critiques are warranted.
While ESG opponents are undoubtedly vocal, that’s not a death knell for this style of asset allocation. In fact, ESG investing is increasingly mainstream, indicating that it’s possible some critics can eventually be converts. That’s potentially good news for exchange traded funds such as the Invesco ESG Nasdaq 100 ETF (QQMG).
Specific to QQMG, the ETF has some advantages. Notably, its underlying index is the ESG answer to the widely observed Nasdaq-100 Index (NDX). That DNA could be attractive to advisors and retail investors. Additionally, QQMG’s methodology addresses many of the concerns held by ESG doubters. That could be a sign that as more investors become familiar with the fund, more allocate capital to it.
As MIT Sloan finance professor Andrew Lo shows, it’s possible for ESG skeptics to come around. In an interview with Betsy Vereckey of the school’s publication, Lo notes he once viewed ESG as no more than an unproven concept foisted upon unwitting investors by “unscrupulous financial institutions.”
ESG Framework Matters
Professor Lo and Peking University’s Ruixun Zhang partnered to author the paper “Quantifying the Impact of Impact Investing,” in which they the explore the potential financial impacts of ESG investing.
“Lo cited the case of the Cystic Fibrosis Foundation, which invested $150 million over several years in Vertex Pharmaceuticals to develop drugs to treat cystic fibrosis. Lo called this a ‘strange conundrum’ — where a nonprofit organization focused solely on impact made a significant profit (over $4 billion) by investing in a company that specializes in the treatment of rare diseases,” reported Vereckey.
Interestingly, Vertex is one of the healthcare stocks held by QQMG. In another paper, Lo and several MIT Sloan colleagues discovered that ESG overlays enhanced portfolios’ returns from 2014 and 2020 and that phenomenon held true across domestic, European and Japanese equities.
As 2022 proved, ESG’s ability to lead and beat the broader market isn’t an annual guarantee. Macroeconomic factors, such as rising interest rates or economic lethargy, can work against this style of investing. However, it also pays to remember that those scenarios are never permanent.
As Lo said in the interview, it is possible for market participants to do well for themselves while doing right by the world at large. As more investors buy into that notion, it could lead to broader adoption of products such as QQMG.
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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.
