SEC Taking a Closer Look at ESG Funds

The rise of environmental, social and governance (ESG) funds is now drawing the attention of the Securities Exchange Commission (SEC) just as the topic 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.

“The SEC initiative is based out of the agency’s Los Angeles office,” said a Wall Street Journal report. “It has focused on advisers’ criteria for determining an investment to be socially responsible and their methodology for applying those criteria and making investments.”

The news comes just as ESG is starting to make an impact in the investment arena and more interest in 2020 should follow. The challenge for these ESG funds is giving investors what they want, which is more ESG offerings, but at the same time, trying to generate a return.

Either way, the trend is leaning towards more growth for ESG.

“You want to follow what institutions are doing. If you’re a big pension fund, ESG is your mandate now. You have no choice but to be adherent, and I think these ETFs are going to continue to outperform,” said Tim Seymour, Seymour Asset Management’s founder and chief investment officer. “We’ve all heard about what’s going on in the oil and gas sector and what companies are going to have to adhere to by 2021, 2022, so, I like the call.”

ESG Via an ETF Wrapper

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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