Momentum is building for environmental, social and governance (ESG) investing strategies, particularly those in the ETFs wrapper. That trend should benefit funds, 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).
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.
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.
“In America and Europe some politicians, bosses, and investors want to shift away from measuring corporate performance based mainly on shareholder returns,” reports The Economist. Climate change is another catalyst. Christine Lagarde, the new head of the European Central Bank, thinks the institution should consider using monetary policy and bank supervision to fight climate change—a shift that would involve assessing which firms are dirtier than others
ESG Examination
The growth of ESG funds is not relegated to simply growing in size, but the actual definition is expanding as well. While climate and sustainability still dominate topically, factors like health and wellbeing benchmarks have been formally added to the GRESB Real Estate Assessment (the ESG benchmark used by the real estate industry worldwide).
ESG’s index is an optimized index designed to provide broad market exposure that is tilted toward U.S. companies that score better with respect to a small set of ESG characteristics and to provide the potential for attractive risk-adjusted performance relative to the STOXX® USA 900 Index, as determined by the index provider.
As an investment concept, ESG (not the ETF) is a fast-growing part of the broader investment lexicon. Over one-quarter of assets under management globally, or over $22 trillion, are now allocated to investments with ESG factors that can materially affect a company’s performance and market value. ESG integration, or the systematic and explicit inclusion of ESG factors in financial analysis, has been steadily expanding at 17% per year.
For more information on socially responsible investing, visit our socially responsible ETFs category.
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.