Taking a Bottom Up Approach to ESG ETF Investments

As investors consider more ways to build up and diversify their portfolios, consider environmental, social and governance exchange traded funds (ETFs) that combine an integrated approach to ESG best practices with enhanced risk-adjusted return potential.

For example, joining the new wave of ETF products based on ESG principles, FlexShares has come out with the FlexShares STOXX US ESG Impact Index Fund (NasdaqGM: ESG) and FlexShares STOXX Global ESG Impact Index Fund (NasdaqGM: ESGG).

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.

“We believe measuring the impact of KPIs on security performance provides a holistic and diversified approach to ESG investing. Specifically, KPI integration improves bottoms-up security selection while removing data-provider bias. The methodology builds an ESG index by essentially coding at the ‘root’ level versus applying an overlay or top-down ESG strategy; it parallels the best behaviors of portfolio managers when it comes to evaluating, sorting and selecting companies for investment,” according to a Northern Trust FlexShares research note.