Environmental, social and governance (ESG) strategies are expected to be a growing corner of the exchange traded funds industry. For those interested in including an ESG theme into a diversified investment portfolio, the FlexShares STOXX US ESG Impact Index Fund (NasdaqGM: ESG) and FlexShares STOXX Global ESG Impact Index Fund (NasdaqGM: ESGG) allow retail investors to easily access an institutional-level investment strategy.
The funds are based on the STOXX global ESG Impact Index, which screens companies scoring better with respect to a select set of ESG key performance indicators (KPIs), with the bottom 50% of such companies based on their ESG KPI scores excluded from the Index, as are companies that do not adhere to the UN Global compact principles, are involved in controversial weapons or are coal miners.
More and more advisers and retail investors are considering ESG strategies and ETFs.
“Until now, much of the growth in environmental, social and governance (ESG) investing has been concentrated among large institutional investors,” said FlexShares. “But the number of financial advisors considering ESG investment products is starting to grow – whether because of idealistic convictions, updated investment guidelines or risk-reduction objectives.”
What are the ESG Benefits?
A 2015 report by Morgan Stanley found that “investing in sustainability has usually met, and often exceeded, the performance of comparable traditional investments. This is on both an absolute and a risk-adjusted basis, across asset classes and over time.”
The outperformance is attributed to better governance practices, along with diminished profit-eroding conflicts with workers, regulators and consumers. Additionally, some popular screens include the exclusion of poison-pill anti-takeover provisions, transparency about executive pay and policies that favor shareholder rights.
ESG, the FlexShares domestic ESG ETF, follows the STOXX USA ESG Impact Index. Most of the fund’s holdings are large-cap stocks and over 36% are designated as value stocks. As FlexShares notes, companies and investors benefit as ESG dialogue increases.
“Robust interest from investors pushes companies to disclose more, which leads to even greater investor interest and more disclosure,” said the issuer. “We believe this circular engagement between investors and companies, as they identify, disclose and monitor KPIs, is immensely important when it comes to steering a firm’s management towards constructive ESG behaviors that may also boost its share price.”
ESGG, the global counterpart to the ESG ETF, also tilts toward value stocks. The fund allocates over 56% of its weight to the U.S. while Japan and the U.K. combine for 17%.
For more information on socially responsible investment strategies, visit our socially responsible ETFs category.