A rough market can be an ideal proving ground for some ETFs and March’s brutal declines are putting the spotlight on environmental, social and governance (ESG) funds, giving advisors and investors a real-time look on how ESG holds up when times get tough.
In what could prove to be good news for 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), some analysts say there are data points suggesting the March meltdown is showing ESG works when markets sag.
“In a new report, companies with better ESG risk profiles beat those with lower ones since the S&P 500 peaked on Feb. 19, according to a report by Sara Mahaffy, U.S. equity strategist at RBC Capital Markets,” reports Leslie Norton for Barron’s.
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.
Ecstatic For ESG
In the past, ESG investing carried the criticism that its investors had to make certain concessions in order to align portfolios with their values. But research shows you don’t have to sacrifice performance when choosing investments for their positive impact. By tapping into smarter data analysis, and insight on material ESG risks and opportunities, investing for good can become better for investors.
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.
“RBC’s findings were echoed in a report by BofA Global Research strategists led by Savita Subramanian,” according to Barron’s. “The report showed that since the Feb. 19 peak, stocks with ESG scores in the top quintile outperformed those that ranked poorly by five to 10 percentage points in the U.S. and Europe. Meanwhile, stocks with lower ESG scores were seeing bigger cuts to earnings forecasts.”
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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.