As investors look for ways to diversify their portfolio, billions of dollars are following into investment strategies and exchange traded funds that specialize in socially responsible investing, notably those focusing on environmental, social and governance factors.

According to Morningstar data, U.S. funds that consider ESG factors attracted a net $8.4 billion in net inflows over the first half of the year, the Wall Street Journal reports.

The inflows over the first six months already beat out the previous annual record of $5.4 billion during 2018. Investors have now funneled $35 billion to what are known as ESG funds since 2013.

The hefty inflows have helped ETFs like the iShares ESG MSCI USA Leaders ETF (SUSL) and the Xtrackers MSCI USA ESG Leaders Equity ETF (USSG) cross the $1 billion dollar mark.

The sudden interest in ESG-related investments also coincides with rising disappointment with traditional asset-managing strategies that failed to outperform the market.

“Active managers look at ESG and think: ‘Here is a space where I can justify some fees,’ because it truly is harder to do,” Robert Jenkins, the global head of research at Lipper, told the WSJ.

More investors are shifting money away from underperforming and expensive stock pickers for lower-cost alternatives that mimic market indices, including smart beta or alternative index-based strategies like ESG. Since 2015, clients have yanked a net $860 billion from actively managed funds while adding a net $2.22 trillion to cheap, index-based funds.

“The passive-index approach doesn’t overlook extensive in-house ESG research” because it still benefits from the thoroughness of outside data providers, Luke Oliver, the head of index investing for the Americas at DWS and head of U.S. ETF capital markets for Xtrackers, told the WSJ.

ESG ETFs, like USSG and SUSL, screen out similar companies that are considered not to be socially responsible or avoid exposure to companies with low environmental, social, and governance ratings.

The three ESG factors cover three separate broad categories. Environmental refers to climate change, greenhouse gas emissions, resource depletion, including water, waste and pollution, deforestation. The social aspect covers working conditions, including child labor, community and indigenous populations, operations in conflict zones, health and safety, employee relations and diversity. Lastly, the governance factor is based on executive pay, bribery and corruption, political lobbying and donations, board diversity and structure, tax structure.

For more information on socially responsible investing, visit our socially responsible ETFs category.

Subscribe to our free daily newsletters!
Please enter your email address to subscribe to ETF Trends' newsletters featuring latest news and educational events.