Investors Who Don’t Embrace ESG Will “Underperform Dramatically”

Environmental, social and governance (ESG) initiatives in the finance world seemed like a relatively new, but nascent concept not too long ago. Now, it’s almost imperative that investment firms, large or small, embrace ESG or be subject to underperformance, according to index provider MSCI.

“We are sounding the alarm bells that if you are an investment institution and you’re not embracing this and taking it into account, it’s going to be at your own peril because your portfolios are going to underperform dramatically because there’s a common repricing and common reallocation of assets around the world according to the ESG criteria,” said MSCI chairman and CEO Henry Fernandez on an episode of CNBC’s “Squawk on the Street.”

The rise of ESG has investors constantly asking for funds that support the initiatives of environmentally-sound practices. Additionally, it’s also drawing the scrutiny of the Securities Exchange Commission (SEC) at a time when ESG became one of the most searched financial terms in 2019, according to a 401(k) Specialist post.

Now that the ESG space is gaining traction, the SEC is putting the industry under the proverbial microscope with the issuance of examination letters to various firms. According to the 401(k) Specialist post, the examination letter asked one asset manager for a list of stocks that comprised the fund and how it determines whether an investment is deemed socially responsible.

Nonetheless, according to Fernandez, expect ESG to be a permanent mainstay in the financial realm.

“For now it’s mostly a directional concept, and then eventually it will become very metrics driven, but you know it’s an evolution,” said Fernandez. He also added that ESG concepts will represent a “permanent change in the way capitalism works.”

Investors who want ESG exposure via an ETF wrapper can take look at the FlexShares STOXX US ESG Impact Index Fund (BATS: ESG). The fund seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the STOXX® USA ESG Impact Index.

The fund will invest at least 80% of its total assets (exclusive of collateral held from securities lending) in the securities of the underlying index. The underlying index is an optimized index designed to provide broad market exposure that is tilted toward U.S. companies that score better with respect to a small set of ESG characteristics and to provide the potential for attractive risk-adjusted performance relative to the STOXX® USA 900 Index, as determined by the index provider.

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