ETFs that capture environmental, social and governance, or ESG, principles can help people capture socially responsible investments, allowing investors to enhance their portfolios in a meaningful way that can positively impact the world.
ESG is seen as a means to manage downside risks, along with the potential to enhance returns.
“Data on ESG factors has become widely available in recent years, and I believe that digging deeper into ESG issues is our shared responsibility as investors. It’s not just about the feel-good elements, it’s about risk management,” Sharon French, Head of Beta Solutions at OppenheimerFunds, said in a note.
ESG investments have gained wider popularity in Europe, with much of the demand coming out of institutions. French pointed out that corporations in Europe are more focused on societal good, which is different than how we think about corporations in the United States but it is slowly starting to change.
However, in the U.S., French noted that investors are “not really voting with their dollars in U.S. retail markets.” ESG investment strategies currently outstrip demand, so therey’s a supply-demand mismatch, despite the voices calling for sustainable investing.
“We’re in the process of talking to our clients and financial advisors about what’s behind this disparity. Is it lingering skepticism about performance? Do advisors and investors understand the risk management benefits? We know that there are mixed messages in the marketplace and confusion around the lack of uniformity in nomenclature. For sustainable investing to take off in the U.S. retail market, we need to address these issues and provide more education to the investing public,” French said.
Socially Responsible ETF Strategies
Investors who believe in the positive attributes of a socially responsible ETF strategy may consider options like the Oppenheimer ESG Revenue ETF (NYSEArca: ESGL) and Oppenheimer Global ESG Revenue ETF (NYSEArca: ESGF).
ESGL targets broad U.S. large-caps through the S&P 500 but screens through Sustainalyics’ proprietary scoring system that focuses on those with positive ESG attributes and employs a revenue-weighted methodology.
ESGF, on the other hand, takes a global approach. The ETF tries to outperform the MSCI All Country World Index with strong ESG practices and re-weights companies based on revenue earned. MSCI ESG Research utilizes a proprietary ESG scoring system and screens companies based on Sharpe Ratio, a measure of risk-adjusted performance.
ESG investments try to deliver returns while monitoring the long-term impact of a company’s business practices on society, the environment and performance of the business.
Along with the ESG weights to potentially enhance returns and limit risks, OppenheimerFunds ETFs also implement a revenue-weighting methodology that could provide diversified exposure to the market, is not influenced by stock price, reflects a truer indication of a company’s value and offers stable sector exposure.
For more information on ESG-related strategies, visit our socially responsible ETFs category.