Advisor and investor conversations regarding environmental, social and governance (ESG) strategies are gaining momentum, something that should drive more attention to ETFs, 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).
However, it’s important investors not only consider ESG principles but assess the validity of these strategies within the confines of their portfolios. For long-term investors, the news is encouraging because data indicate companies that prioritize ESG principles can offer investors positive outcomes.
“I think all investors can agree that ESG risks can have a material financial impact on companies. Climate change can disrupt global agricultural supply chains and have an impact on the bottom lines of firms,” said Morningstar’s Ben Johnson in a recent note. “The Facebook (FB) Cambridge Analytica data breach represented a violation of the social network’s social contract with its users. Its share price suffered as a result of the firm’s inability to protect its users’ information.”
Recent performances confirm ESG not only matters but rewards investors. Data confirm that investors poured into ESG ETFs in the first quarter, indicating the coronavirus pandemic shined a light on the utility of funds such as ESG and ESGG.
Active Decision
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.
“I also think that all investors can agree that introducing ESG criteria into an investing framework is an active decision,” notes Johnson. “Like any active decision, the only guarantee is that ESG investors’ performance will be different than the market. It might be better. It might be worse.”
The ESG factors are an all-inclusive categorization, so investors should not see this as something like an exclusionary based investment approach. Furthermore, the responsible investment and ESG-related investment strategy is not indented to sacrifice performance or lower returns for the sake of achieving their goals. In essence, ESG investments have even shown to generate improved risk-adjusted returns over time.
ESG, the FlexShares fund, is beating the S&P 500 year-to-date and by almost 140 basis points over the past year.
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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.