Environmental, social and governance (ESG) investing concepts are receiving increased attention and ETF issuers are rushing to meet investors’ interest in ESG products. At just over three years old, the aptly-tickered FlexShares STOXX US ESG Impact Index Fund (CBOE: ESG) is one way for investors to tap virtuous market concepts.
Up nearly 18% this year, ESG is proving sturdy in its category. The fund has a global counterpart, the 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 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.
Data for environmental, social and governance (ESG) has been an ongoing challenge in the space, but signs are apparent that the area is improving. This could certainly help ease investor fears at a tenuous time where trade wars and inverted yield curves are on their minds.
ESG, the ETF, holds nearly 300 stocks with almost 40% of its weight allocated to the technology and communication services sectors. Even with those allocations to growth sectors, ESG’s growth/value split is almost even.
Examining ESG Plays
The three ESG factors cover three separate broad categories. Environmental refers to climate change, greenhouse gas emissions, resource depletion, including water, waste and pollution, deforestation. The social aspect covers working conditions, including child labor, community and indigenous populations, operations in conflict zones, health and safety, employee relations and diversity. Lastly, the governance factor is based on executive pay, bribery, and corruption, political lobbying and donations, board diversity and structure, tax structure.
FlexShares carves out its own views on ESG that, over the long-term, could positively separate ESG from rival funds.
Sustainability themed investing selects assets related to sustainability in single- or multi-themed funds. Corporate engagement and shareholder action use shareholder power to influence corporate behavior. Norms-based screenings hone in on investments against minimum standards of business practices based on international norms. Lastly, ESG integration seen as a systematic and explicit inclusion by investment managers of ESG risks and opportunities into traditional financial analysis.
As investors look for ways to diversify their portfolio, billions of dollars are following into investment strategies and ETFs that specialize in socially responsible investing, notably those focusing on environmental, social and governance factors.
According to Morningstar data, U.S. funds that consider ESG factors attracted a net $8.4 billion in net inflows over the first half of the year, the Wall Street Journal reports.
For more information on socially responsible investing, visit our socially responsible ETFs category.