Looking at 2019’s ESG Explosion: What It Means For 2020

During Monday’s episode of “ETF Edge” on CNBC, host Bob Pisani discussed one of 2019’s most significant breakout themes: ESG (Environment, Social, and Governance funds). ESG made for some of the most successful ETF launches of the year while attracting government attention.

Pisani was joined by Luke Oliver, Head of Index Investing, Americas at DWS Group, to discuss the rise of ESG. Digging in, Pisani noted how 2019 had started with ESG merely being a nice idea, only for the money to start rolling in. DWS, in particular, launched the Xtrackers MSCI USA ESG Leaders Equity ETF (USSG) in March 2019.

“We certainly had the equity market covered in ESG, and we saw incredible flows, over $8 billion last year,” Oliver said. “Flows into ESG were very strong.”

Looking at how ESG suddenly gained a sharp positive turn, Oliver explained how a misconception comes from when ESG is placed up against concepts such as cannabis or cryptocurrency to make it seem new. Really, ESG tends to be composed of many investors’ favorite companies that have strong characteristics towards the environment and the other sensible ways to score a fund.

“These aren’t actively overly activist approaches to picking stocks,” Oliver said. “So, really these are just stocks that have not only been measured against financial metrics, but these are now new non-financial metrics that can have big impacts on performance. So, that’s how we approach it.”

The ESG Inflection Point

Looking to Armando Senra, head of iShares Americas for BlackRock, also on the panel, Pisani brought up the iShares ESG MSCI USA Leaders ETF (SUSL), and asked for additional thoughts on the sudden growth in the ESG market. Senra believes 2018 was an inflection point, where there were signs of an increase through interest and actual flows.

“What I would say about 2020,” Senra states, “Is that change from just being about beliefs and this idea that you’re investing in ESG because that’s what you believe in; to move into understanding what the ESG-related risks are in a portfolio and how you can alleviate them. So, there are real risks on ESG factors that could have an impact in real world investing.”

Pisani noted how the holdings for the ETFs mentioned give the impression of a high-quality growth portfolio. Keeping the big names in mind, which may seem perplexing when considering the involvement of businesses such as Microsoft (MSFT) and various oil companies, there are specific criteria that do allow these corporations to meet ESG criteria.

As Oliver stated, there is something to be said for that inflection point, which has tools allowing investors to be to participate alongside their ESG values, but without a narrow view on which companies to hold. Ultimately, investors are getting the markets they’ve always invested in, but have narrowed it down to the companies that have shown value.

Watch the ETF Edge Segment Focused On 2019’s ESG Explosion:

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