Fiduciaries Matter When It Comes to ESG Fund Application | ETF Trends

As the landscape of environmental, social, and governance (ESG) exchange traded funds continues growing, so does investors’ interest in applying ESG principles in their portfolios.

Many don’t know where to start. The rapidly expanding landscape and fluidity in ESG ratings and scoring are among the issues confounding ESG-inclined retail investors today, underscoring the importance of advisors in this equation.

Along those lines, LeafHouse Financial recently wrapped up its DOL investigation surrounding environmental, social, and governance (ESG) investment options in ERISA plans.

“Among LeafHouse’s crucial takeaways is the importance of having a process. We believe fiduciaries must have a clear and repeatable process when selecting any type of investment, including ESG, for their client’s ERISA plans. At LeafHouse, we work to achieve that by screening investments using our proprietary LeafHouse Grade Point Average® (GPA) system, to score funds based on a peer-to-peer ranking system, accounting for performance, risk and expense,” notes Michael Garberich, LeafHouse senior investment officer and director of analytics.

Advisors and plan sponsors don’t have to stretch to apply these principles. Many are already doing so on a daily basis.

“Another important finding is to always begin investing in ESG through the lens of a fiduciary. By using a fiduciary framework to identify and select ESG investments, it will help plan sponsors avoid scrutiny and identify funds without adequate track records, those that are prone to greenwashing, and many other details that can be missed during standard research processes,” adds Garberich.

That speaks to simplicity as well. As noted above, the landscape of ESG ETFs is expanding at a feverish pace, but some funds are complex, while others don’t adequately address true ESG principles.

Fortunately, some avoid those pitfalls, including the Invesco ESG S&P 500 Equal Weight ETF (RSPE). RSPE is the ESG counterpart to the Invesco S&P 500 Equal Weight ETF (RSP) — the largest equal-weight ETF.

RSPE follows the S&P 500 Equal Weight ESG Leaders Select Index and holds 182 stocks. Those holdings are generally the top 40% as measured by ESG scores from each of the 11 Global Industry Classification Standard (GICS) sectors. Of course, RSPE makes good on limiting single-stock risk, as the largest weight assigned to any of its holdings is just 0.78%. More than 37% of its holdings are classified as value stocks, while over 15% bear the growth label.

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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.