As the universe of environmental, social and governance (ESG) exchange traded funds continues expanding, advisors and investors are paying more attention to exactly what constitutes an ESG ETF.
In other words, the destination is the combination of ESG and ETF under one umbrella, but the journey to that point is becoming equally as important to asset allocators. That could be a plus for ETFs such as the Invesco ESG Nasdaq 100 ETF (QQMG) and the Invesco ESG NASDAQ Next Gen 100 ETF (QQJG), both of which employ easy-to-understand approaches.
“ESG is literally information, in the form of data and ratings, about environmental, social, and corporate governance challenges that may affect an investment decision. It is an input to the investment process. ESG analysis is the interpretation of that information as part of the investment decision-making process. Similarly, for companies, ESG analysis informs the capital-allocation process,” noted Morningstar analyst Jon Hale.
QQMG is the ESG counterpart to the Invesco QQQ Trust (QQQ) or the Invesco NASDAQ 100 ETF (QQQM) while QQJG follows an ESG index that serves as a training ground of sorts for stocks waiting on promotions to QQQ, QQQM, and QQMG.
Indeed, QQMG and QQJG are growth-heavy ETFs loaded with technology stocks, but the funds also check the box of being data-intensive approaches to ESG investing.
“Because adding this kind of information to the investment process provides investors with a more complete view of a company. This is especially relevant in a time when the typical large corporation has more intangible than tangible assets on its balance sheet, and pressing issues like climate change (especially), natural-resource limits, competition for talent, and perceptions of a firm’s broader impact on the world can have material ramifications,” added Hale.
While there this no perfect, 100% foolproof way of constructing ESG ETFs, QQMG and QQJG are steps in the right direction due to the pair’s straight-forward methodology, which leads to rosters with companies with quality traits and attributes that show potential for diminished exposure to ESG controversies.
“To be sure, there is no single ‘correct’ way to use ESG information, and so we see considerable variation across asset managers in how they integrate ESG into their processes. Virtually all focus on what they consider to be financially material ESG issues, which can vary by industry and company,” concluded Hale.
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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.