Does Your ESG Portfolio Identify Potential Risks to Companies’ Financials?

ESG has risen to the center stage in recent years, heavily influencing investors’ allocation decisions. 

Companies face growing pressure from regulators and investors to address concerns such as climate change, worker health and safety, and diversity and inclusion. A growing body of research is showing that how they manage these issues is likely to have a material impact on their balance sheets, income statements, and share prices, according to FlexShares. 

FlexShares has five strategies in its ESG ETF suite that offer the building blocks of a diversified core portfolio for individuals or model portfolios. Together, they provide broad market exposure, the risk characteristics of core benchmarks, and holistic integration of key sustainability criteria, according to the firm. 

“The FlexShares ESG ETFs go beyond many traditional index-based products as they identify potential future risks to a company’s financial results. With fully transparent index-based ETFs, advisors do not need to wait for a three year record to begin due diligence efforts,” Todd Rosenbluth, head of research at ETF Trends and ETF Database, said.  

To offer a consistent measure of sustainability, FlexShares’ core ESG ETFs use the ESG Vector Score developed by Northern Trust Asset Management, the investment advisor for FlexShares ETFs, according to the firm. 

The ESG Vector Score is designed to focus on ESG-related business issues most likely to impact a company’s financial performance — and ultimately a portfolio’s investment return. The firm’s scoring methodology employs a framework established by the Sustainable Accounting Standards Board (SASB) that identifies 26 categories of general sustainability issues that affect company performance. Then, SASB determines which of those issues are most relevant to a particular sector or industry, FlexShares wrote in an insight. 

The three equity ESG strategies offered by FlexShares include the FlexShares ESG & Climate U.S. Large Cap Core Index Fund (FEUS), the FlexShares ESG & Climate Developed Markets ex-US Core Index Fund (FEDM), and the FlexShares ESG & Climate Emerging Markets Core Index Fund (FEEM)

The suite also includes two fixed income strategies, including the FlexShares ESG & Climate High Yield Corporate Core Index Fund (FEHY) and the FlexShares ESG & Climate Investment Grade Corporate Core Index Fund (FEIG).

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