ESG Not Perfect, but Still Has Long-Term Merit, Says Expert

There’s no denying it. As an investing methodology, environmental, social, and governance (ESG) has endured its share of criticism and regulatory scrutiny. However, there’s another side to that coin.

Notably, ESG is now viewed as an integral in sustainable investing. Additionally, it’s no longer considered a corporate buzz phrase rooted in aspiration. It’s accessible, tangible, and an increasingly prominent part of the corporate lexicon. Those could be signals that there’s long-term viability for exchange traded funds such as the Invesco ESG Nasdaq 100 ETF (QQMG) and the Invesco ESG Nasdaq Next Gen 100 ETF (QQJG).

As their names imply, QQMG and QQJG follow benchmarks that are descendants of the famed Nasdaq-100 Index (NDX). That’s advantageous when some critics assert some index providers and fund issuers are applying ESG labels simply in the name of selling products. With their NDX ties, QQMG and QQJG provide investors with a trusted methodology that’s fortified by ESG scoring.

Speaking of ESG Scoring

Environmental, social, and governance ratings and scoring have been an area of emphasis for naysayers. Critics allege that the ratings lack clarity and related scoring is applied too liberally. In what could be a positive for funds such as QQJG and QQMG, there are improvements on these fronts.

“Merited criticisms of ESG highlight issues such as opaque ratings methodologies, conflicts of interest, and the need for greater transparency for ESG rating providers. Without additional data points, aggregated ESG ratings are questionable. Because a high score in one of the E, S, G pillars can compensate for a poor score in another pillar, companies can compensate for deforestation, for example, by having more diversity on their management team,” wrote Alexandra Mihailescu Cichon, chief commercial officer at RepRisk, in an editorial for Reuters.

QQJG and QQMG have another advantage in terms of steering clear of ESG controversy. It is the information-rich methodologies applied by the ETFs’ indexes. Those data-rich approaches are pertinent when everyone believes more information is vital in improving investing outcomes.

“Yet, investors and companies benefit from more, not less, information. This information can help identify financial, reputational, and compliance risks, which may materialize into adverse impacts for a company, its investors, and for people and the planet. While the term itself is being challenged, most stakeholders agree on the majority of ESG’s underlying principles – nature preservation, clean air and water, fair labor practices, to name a few,” added Cichon.

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