Environmental, social, and governance (ESG) standards are sweeping across various sectors, including financial services. Investors may be surprised to learn that funds like the Invesco KBW Bank ETF (NASDAQ: KBWB) offer favorable ESG traits.

KBWB tracks the widely followed KBW Nasdaq Bank Index.

“The Index is a modified-market capitalization-weighted index of companies primarily engaged in US banking activities. The Index is compiled, maintained and calculated by Keefe, Bruyette & Woods, Inc. and Nasdaq, Inc. and is composed of large national US money centers, regional banks and thrift institutions that are publicly traded in the US,” according to Invesco.

New regulations underscore the potential of bank stocks as ESG plays.

“On 3 and 4 March, the US Securities and Exchange Commission (SEC) and Federal Deposit Insurance Corporation (FDIC) announced separate initiatives on environmental, social and governance (ESG) risks and diversity, equity and inclusion (DEI) commitments. The SEC announced a task force for ESG and climate and included ESG and climate-related risks in its 2021 examination priorities. The FDIC released a DEI plan that commits to reinforcing DEI objectives among the financial institutions it supervises,” according to Moody’s Investors Service.

KBWB Meets ESG

As Moody’s notes, there are positive credit implications for banks on the road to more robust ESG standards.

“The initiatives are credit positive for US banks because regulators’ increasing focus on emerging environmental and social risks will ensure bank management attention on the issues and encourage best practices across the industry,” according to the research firm. “The SEC’s Division of Examinations included climate- and ESG-related risks in its 2021 examination of potential risks to investors and the integrity of US capital markets. The SEC said it plans to integrate climate and ESG considerations in its broader regulatory framework and examine business continuity plans as climate-change-related physical risks intensify.”

For some time, financial services stocks have been viewed as a value destination, but low interest rates weighed on the thesis for the sector. With cyclical stocks rebounding and the economy showing some signs of life, KBWB is looking more attractive. Those alluring traits were in place before 10-year yields took off, meaning KBWB has multiple upside catalysts.

“We assess banks’ environmental risk as low because of the indirect nature of their primary exposures through investment and lending decisions. However, the transition to a low-carbon economy increases banks’ business risk because their customers, investors and regulators expect them to meet broader carbon transition goals in their role as capital providers. Regulatory interest in identifying banks’ exposure to carbon emissions through their financing activities, including stress testing and scenario analysis, is growing,” adds Moody’s.

KBWB is up over 50% the last six months.

KBWB 6 Month Total Return

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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.