Momentum continues building around sustainable investing as more fund investors are mulling environmental, social, and governance (ESG) strategies such as the FlexShares STOXX US ESG Impact Index Fund (CBOE: ESG) and its global counterpart, the FlexShares STOXX Global ESG Impact Index Fund (CBOE: ESGG).
Many market observers see these trends as wide-ranging with long-term implications that could benefit end-users.
“Sustainable investment is one of the few long-term growth stories in finance and there’s much more growth to come. There are attractive opportunities for investors, entrepreneurs, start-ups, service providers, and researchers. So get on board and be a part of this positive change,” writes David Maywald for FactSet.
When covering ESG investments, the environmental aspect includes attributes like climate change, natural resources, pollution, waste management, and other environmental opportunities. The social aspect incorporates human capital, product liability, stakeholder opposition, and other social opportunities. Lastly, the governance aspect covers things like corporate governance and corporate behavior. Importantly, COVID-19 is showing investors the benefits of ESG funds.
ESG Momentum Builds
U.S.-listed sustainable funds are enjoying record inflows year-to-date, despite the market turmoil, CNBC reports.
According to Morningstar data, global sustainable funds saw inflows of $45.7 billion, while the broader fund universe had an outflow of $384.7 billion. In the U.S., sustainable funds experienced a record $10.5 billion of inflows over the first quarter.
As more investors look to ESG investing strategies, one should compare how it is different from Socially Responsible Investing or Impact Investing and consider an ETF strategy to effectively integrate ESG into a diversified portfolio.
“Conventional economics has been seriously damaging the environment and our society for decades. Every parent, consumer, and investor knows it; fossil fuel promoters and ESG laggards especially,” notes Maywald. “Poor disclosure, free pollution, and misaligned remuneration are part of the problem. But sustainable investment and renewable energy are an essential part of the solution.”
ESGG is 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.
“Rewards and penalties will become sharper in the future with remuneration linked to ESG/longer-term/qualitative outcomes. There will be a greater dispersion of cost of capital, from the best to worst performers,” according to Maywald.
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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.