Environmental, social and governance (ESG) investing interest is exploding in the capital markets—even more so during the coronavirus pandemic. However, before investors dive into ESG, they must understand the long-term risk associated with the space as it continues to grow in popularity.
“All investments have impacts on the environment and society, and investors increasingly want to know about these impacts and what they mean for their investments,” wrote Andy Pettit in a Morningstar article. “First, investors want to know how these impacts align with their values. Second, investors increasingly want to consider long-term environmental, social, and governance risks such as climate change when they make long-term investments. However, investors do not fall into exclusive camps of being focused on either values or risk. Rather, many investors care about both aspects to varying degrees simultaneously.”
The article noted the following with respect to ESG risks:
- Investors can incorporate ESG preferences while also seeking competitive returns
- There are two approaches to incorporating ESG preferences into a portfolio
- Evaluating long-term risks, including ESG risks, is fundamental to investing
- A new focus on clients’ ESG preferences
Click here to read the full article regarding these risks.
ETF investors looking for plays in ESG can look to funds like the FlexShares STOXX US ESG Impact Index Fund (CBOE: ESG). For investors who want ESG exposure, as well as global diversification, can look to the FlexShares STOXX Global ESG Impact Index Fund (CBOE: ESGG).
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.
ESGG seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the STOXX® Global ESG Impact Index. The index is designed to reflect the performance of a selection of companies that, in aggregate, possess greater exposure to environmental, social, and governance characteristics relative to the STOXX® Global 1800 Index, a float-adjusted market-capitalization weighted index of companies incorporated in the U.S. or in developed international markets. The fund will invest at least 80% of its total assets in the securities of the index and in ADRs and GDRs based on the securities in the index.
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