As the landscape of environmental, social, and governance (ESG) funds grows and evolves, more end users are demanding clarity on ESG ratings and scoring.
Those demands are escalating at a time when market participants, many of whom are eager to embrace ESG funds, are increasingly concerned about greenwashing — or funds purporting to be ESG when they’re not. Investors looking to avoid such a pitfall might want to consider the Goldman Sachs JUST U.S. Large Cap Equity ETF (JUST).
JUST, which can be an alternative or complement to traditional pure beta broad market funds, goes beyond prosaic ESG metrics, offering investors a deep, data-rich approach to ESG and sustainability.
“JUST Capital collects and analyzes data from a diverse range of sources, utilizing over 145,000 data points across 88 unique metrics to score the performance of Russell 1000 Index companies across a variety of issues, including worker treatment, customer concerns and environmental impacts,” notes Goldman Sachs Asset Management (GSAM).
JUST’s multi-pronged, data-driven approach is relevant as more companies and investors are focusing on ESG ratings and demanding solutions that credibly align with those goals.
“Environmental, Social, and Governance ratings have become a key focus for companies and investors. By achieving good ESG ratings, a company can receive positive market recognition. As a result, companies now tend to spend more time and effort on improving ESG ratings in order to attract investors,” according to IHS Markit research.
As is the case with a pure beta fund, JUST’s components are weighted by market capitalization, but only those with above-average JUST scores make the cut for inclusion in the fund’s underlying index. That methodology ensures that investors are getting a legitimate ESG vehicle without embracing too much equity risk.
“ESG rating agencies vary by rating system and methodology. They are ideal for investors getting familiar with ESG and provide an overview of a company’s performance in this area,” adds IHS Markit. “However, ESG ratings may not provide the complete picture. They are generally based on public disclosures, which vary in quality and reporting framework. Meanwhile, as touched on above, there is a lack of consistency in terms of methodology, measurement, and definition across ESG rating agencies.”
Another issue mentioned by Markit is ESG storytelling, or, as the research firm puts it, “a good story founded on good-quality and relevant quantitative data will resonate with different stakeholders, engage them and in turn drive change.”
Points such as those further underscore the favorable traits of JUST relative to traditional ETFs in the ESG category.
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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.