JUSTification for Mandating ESG Disclosures Increases | ETF Trends

The notion of companies making environmental, social, and governance (ESG) disclosures is a relatively new phenomenon, but more and more companies are embracing the task.

That’s a positive for investors, and the further adoption of ESG disclosures could have long-term benefits for exchange traded funds such as the Goldman Sachs JUST U.S. Large Cap Equity ETF (JUST). Recent work by the Global Research Alliance for Sustainable Finance and Investment (GRASFI) indicates that there’s merit in ESG disclosures.

“As the dangers of environmental, social and governance (ESG) risks have been broadly explored and acknowledged, many countries have imposed mandatory rules on companies to report more information on these issues in their financial disclosures or standalone sustainability reports,” according to BNP Paribas. “One driving factor is the need to improve the supply of information by companies to investors and other stakeholders, whose demands for more disclosure on ESG risks have grown both considerably and rapidly. However, has mandatory ESG disclosure really made any difference?”

JUST is relevant in this conversation because the Goldman Sachs ETF goes well beyond simply excluding environmental offenders, sin stocks, and companies that make civilian firearms — the typical hallmarks of old guard ESG funds. JUST Capital, JUST’s index provider, scours 145,000 data points across 88 unique metrics to construct a refreshed, relevant view of ESG investing. This has utility at a time when ESG disclosures are a focal point for many companies.

According to the GRASFI study, “the percentage of companies that file ESG reports in the Global Reporting Initiative (GRI) database, which allows investors to easily access and bulk-download ESG reports, increases by 56% after ESG disclosure is made mandatory,” notes BNP Paribas.

Should mandatory disclosures increase in prevalence, that could be an obstacle for smaller companies. To that point, JUST functions as an ESG alternative to traditional pure beta broad market funds, and the Goldman Sachs ETF is chock full of larger companies that can meet the demands of elevated ESG reporting requirements.

“Mandatory disclosure will have a bigger effect on smaller firms as they are less likely than their larger peers to have voluntarily disclosed ESG information before. The authors found that smaller firms – as well as those with lower ESG quality – are more likely to file ESG reports after mandatory disclosure is introduced,” adds BNP Paribas.

JUST is up 24.24% year-to-date and resides near record highs.

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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.