Broad-based environmental, social and governance (ESG) exchange traded funds, including the FlexShares STOXX US ESG Impact Index Fund (CBOE: ESG) and the FlexShares STOXX Global ESG Impact Index Fund (CBOE: ESGG), are increasingly favored by advisors and investors and some analysts say it’s easy to understand the allure.

“So, a lot of times, these have these similar types of exclusions,” said Morningstar analyst Alex Bryan. “But then they also have screens in place to tilt toward firms that have really strong environmental, social, and governance practices, what we call ESG. The focus of a lot of these funds is on how firms operate rather than on the products they produce.”

ESG seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the STOXX® USA ESG Impact Index. The underlying index is designed to reflect the performance of a selection of companies that, in aggregate, possess greater exposure to ESG characteristics relative to the STOXX® USA 900 Index, a float-adjusted market-capitalization weighted index of U.S.- incorporated companies. Under normal circumstances, the fund will invest at least 80% of its total assets in the securities of the underlying index.

ESG Evolution: Increasing Prominence

The widespread proliferation of environmental, social and governance investments will require global data standards and regulations to further progress.

Give the breadth of various ESG indices, regulators and policy makers are concerned that companies will embark on “rating shopping” tours to pick the ESG index provider for an index that best suits their ESG narrative.

“Broad ESG funds have really attracted the lion’s share of assets–in particular, broad ESG equity funds,” says Bryan. “So, really, investors are looking for core portfolio solutions to serve as substitutes for traditional index and active products. So, that’s where we’ve seen the bulk of the assets go. There are a fair bit of assets going into exclusionary funds as well, and a lot fewer going into the more niche thematic products. But broad ESG is where most of the action has been.”

The growth of the ESG may be associated with more people investing with their core values. Three-quarters of global individual investors and 71% in the U.S. noted that it is important to align investments with their values and ethics. While there is a feel-good component to the category, ESG or sustainable investments may also enhance a long-term portfolio.

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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.