ESG is Becoming a Greater Factor in the Investment Process, Study Says

Environmental, Social and corporate Governance (ESG) is still trying to break through to the mainstream in the financial realm, but a new research report from Corbin Advisors helps to clarify common misconceptions for institutional investors and corporate executives.

The Corbin research, based on data from an ongoing study comprising 500+ institutional investors and nearly 100 Investor Relations Officers at top U.S. companies found that:

  • 76% of investors assert ESG has become a greater factor in their investment process over the last two years.
  • 73% report the “G” is important to critical to their investment decisions, compared to only ~30% for the “E” and “S.”
  • 48% of investors identify Data Quality/Access, particularly for Small-caps, as the top frustration when it comes to ESG factors.
  • Over 75% of IROs report they have identified material factors impacting their company.

The research, conducted in concert with the University of Connecticut, also identified several key takeaways for companies looking to better integrate ESG factors into company performance measurement and operations:

  • ESG reports are one input for investors in their comprehensive research approach; a low ESG score will not necessarily result in a sell decision
  • ESG is not a one-size-fits-all approach; it is critical to identify materiality factors for your industry and then conduct the same analysis for your company based on key stakeholder views
  • While resources and budgets are more challenging for small-caps, it is critical to communicate where you are in your ESG journey; investors are looking for progress, not perfection

ESG ETF Plays to Consider

One ETF to consider is the Xtrackers MSCI USA ESG Leaders Equity ETF (NYSE Arca: USSG), which was developed in collaboration with Ilmarinen, Finland’s largest pension insurance company. The expense ratio for USSG is 0.10%, which is well below the average cost of 0.39% for ESG funds, making it ideal for investors who are also seeking a low-cost solution to add ESG to their portfolios.

According to a survey of subscribers to Inframation, an Acuris company, nine out of ten responding agreed that in the past 12 months, Environmental, Social and Governance (ESG) criteria has become a more important part of their investment decision-making.

Poor governance and environmental problems present themselves as roadblocks to profitability, but research finds no direct link between better ESG credentials and the improved financial performance of private infrastructure companies. In the survey, about 25 percent of respondents cited investor or LP requirements as the reason for increasing ESG consideration.

Furthermore, about 50 percent of respondents said “improved brand and reputation” was the main reason for the shift. In addition, larger often institutional or pension-based LPs are responding to changes in society.

Furthermore, while ESG ETFs are still vying for market share in the ETF space, it appears to be progressing with the advent of new products meeting demand. In fact, sustainability is one DWS’s four core values, not only from an investment perspective, but also as a financial market participant.

USSG seeks investment results that correspond generally to the performance, before fees and expenses, of the MSCI USA ESG Leaders Index. In order for companies to be included in the fund, the methodology includes a comprehensive screener that filters out alcohol, weapons, gambling, and other controversial products or activities.

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