Socially responsible exchange traded funds that target environmental, social and governance principles are beginning to gain a greater investor following, attracting record inflows this year.
According to Morningstar data, ESG-related funds have raked in a record $13.5 billion in net new inflows from investors over the first three quarters of the year, the Wall Street Journal reports.
ESG ETFs screen out 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.
Not All Equal
However, not all ESG ETFs are created the same, and some still include exposure to big oil and gas companies. For instance, eight of the 10 biggest U.S. sustainable funds by assets are exposed to the crude oil business. To be fair, the exposure to the energy companies only account for a small portion of most ESG fund holdings.
A BlackRock spokesperson told the WSJ that the company designed its sustainable funds to provide investors similar risk and returns that many would achieve in broad market indices all while incorporating exposure to the highest ESG-rated companies for each sector. A Vanguard spokeswoman referred index-related questions to FTSE Russell, which runs the benchmark on its funds.
“The biggest frustration on behalf of investors is there’s no standardization within this industry,” Rebecca Corbin, founder of capital-markets research and advisory firm Corbin Advisors, told the WSJ.
Corbin explained that while energy companies may score poorly on the environmental factor, these companies may do well under the social or governance categories, which would give them a place in an ESG-related fund. Similarly, a company with a high environmental rating but poor social or governance factors may also be included in the same fund.
For more information on the ESG theme, visit our socially responsible ETFs category.