Consequently, companies included will be undergo a rigorous process to select those that have adhered and incorporated characteristics found with strong environmental, social and governance principles.
“These key performance indicators usually indicate overall health of the company so you don’t compromise return,” Dzanis said.
For example, joining the new wave of ETF products based on ESG principles, FlexShares has launched the FlexShares STOXX US ESG Impact Index Fund (NasdaqGM: ESG) and FlexShares STOXX Global ESG Impact Index Fund (NasdaqGM: ESGG).
The funds are based on the STOXX global ESG Impact Index, which screens companies scoring better with respect to a select set of ESG key performance indicators (KPIs), with the bottom 50% of such companies based on their ESG KPI scores are excluded from the Index, as are companies that do not adhere to the UN Global compact principles, are involved in controversial weapons or are coal miners.
“KPI integration improves bottoms-up security selection while removing data-provider bias,” according to FlexShares. “The methodology builds an ESG index by essentially coding at the ‘root’ level versus applying an overlay or top-down ESG strategy; it parallels the best behaviors of portfolio managers when it comes to evaluating, sorting and selecting companies for investment.”