May is already in the books, but data from the fifth month of the year confirm it was another strong one for environmental, social and governance (ESG) 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).

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.

“Environmental, Social, and Governance (ESG) ETFs and ETPs listed globally gathered net inflows of US$4.33 billion during May, bringing year-to-date net inflows to US$28.53 billion which is significantly more than the US$7.19 billion gathered at this point last year,” said Deborah Fuhr of ETFGI, in a note out Thursday.

Long-Term Trend

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.

ESG investing is well past the point of being a fad. It’s a pivotal, long-term asset allocation trend.

“Total assets invested in ESG ETFs and ETPs increased by 10.4% from US$74.03 billion at the end of April 2020 to reach a new record of US$82 billion at the end of May, according to ETFGI’s May 2020 ETF and ETP ESG industry landscape insights report,” notes ETFGI.

While ESG ETFs are an increasingly important part of the asset allocation lexicon, advisors need to clarify some myths and erase confusion for clients.

“Confusion persists around what constitutes an ESG fund. According to PRI, an UN-supported initiative that seeks to understand the investment implications of ESG issues, 56% of adopters believe there is a lack of clarity in ESG definitions,” said Fuhr. “ETFGI’s classification system attempts to provide greater precision, with ETFs/ETPs listed globally organized into categories, including core ESG products and theme-based groups, such as Clean/Alternative Energies and Gender Diversity.”

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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.