Evaluating the Essential Nature of ESG | ETF Trends

There’s escalating debate about environmental, social, and governance (ESG) investing — much of it is along ideological lines, but some experts believe that ESG isn’t relevant to investors.

They view it as an increasingly essential part of corporate stewardship, indicating that as more companies prioritize ESG principles, this style of investing could gain more traction with market participants. Assuming that happens, exchange traded funds such as the Invesco ESG Nasdaq 100 ETF (QQMG) stand to benefit.

QQMG is just 10 months old, making it young relative to many funds in the ESG ETF category. Still, the Invesco product is relevant against the backdrop of increasing corporate emphasis on ESG and sustainability.

“Across industries, geographies, and company sizes, organizations have been allocating more resources toward improving ESG. More than 90 percent of S&P 500 companies now publish ESG reports in some form, as do approximately 70 percent of Russell 1000 companies,” according to a recent McKinsey report on ESG.

While QQMG holds just 96 stocks, it’s a more than adequate contender in the ESG ETF arena because many of the fund’s member firms are already ESG leaders. That’s by virtue of the fact that QQMG leans heavily into growth stocks, including an almost 62% allocation to the technology sector.

For investors, that’s a favorable trait because many of the sectors that have historically encountered issues with ESG offenses, such as energy, materials, and utilities, are defensive or value sectors — groups barely found in QQMG.

Another reason QQMG could find itself at the right time is simple math. The overall growth trajectory of inflows of ESG funds is impossible to deny, and that’s even with the struggles of growth stocks in 2022.

“The rising profile of ESG has also been plainly evident in investments, even while the rate of new investments has recently been falling. Inflows into sustainable funds, for example, rose from $5 billion in 2018 to more than $50 billion in 2020—and then to nearly $70 billion in 2021; these funds gained $87 billion of net new money in the first quarter of 2022, followed by $33 billion in the second quarter,” added McKinsey.

Another, longer-ranging source of allure with QQMG could be companies’ increasing focus on social and governance following years of emphasizing environmental issues.

“But other components of ESG, in particular the social dimension, have also been gaining prominence. One analysis found that social-related shareholder proposals rose 37 percent in the 2021 proxy season compared with the previous year,” concluded McKinsey.

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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.