Investors can look to achieve “sustainable alpha” or socially responsible portfolio outperformance through the use of impact exchange traded fund investment strategies aligned to the UN’s Sustainable Development Goals.
In the recent webcast, Sustainable Alpha: How Thematic Investing Seeks to Deliver Dual Impact, Wendy Wong, head of sustainable investment partnership at New York Life Investments, and Keith Dixson, head of international business development at CANDRIAM, a New York Life Investments company, outlined what ESG investments are all about.
The environmental factor includes issues relating to the quality and condition of the natural environment, such as greenhouse gas emissions, climate change, renewable energy, energy efficiency, and waste management. The social factor covers issues relating to the rights, well-being, and interests of people and communities, including areas such as human rights, labor standards, workplace health and safety, employee relations, diversity, consumer protection, and controversial weapons. Lastly, the governance factor covers issues relating to the governance of companies and their stakeholders, including topics such as board structure, size, diversity, skills, and independence.
“We know that the ‘ESG’ in ESG investing stands for environmental, social, and governance. But within this category, there have been (and continue to be) different methods of ESG investing, ranging from exclusionary investing to impact investing. How did we get here? How would you define impact investing?” Wong asked.
Dixson explained that there are various types of ESG or sustainable investing styles. For starters, an ESG integration style considers or integrates ESG factors into their investment approach alongside other material factors used to assess the risk/reward profile of securities. Exclusionary investing excludes controversial companies or sectors that do not meet certain sustainability criteria. Inclusionary investing seeks positive ESG outcomes by selecting companies based upon their ESG profiles in their sector. Lastly, impact investing attempts to deliver measurable social and/or environmental impact as one of the objectives, in addition to delivering financial returns.
“Impact investing came about around a decade ago, and refers to investments in companies, organizations, or funds that have the express purpose of having a beneficial impact on the world. Some impact funds donate a portion of their management fees to a non-profit partner,” Dixson said.
Impact investments aim to address sustainable development goals established by the United Nations in 2015, including things like no poverty, zero hunger, gender equality, clean water and sanitation, affordable and clean energy, responsible consumption and production, and climate change, among others.
“Today, impact investing is understood to be aligned with the United Nations Sustainable Development Goals, a collection of 17 global goals set in 2015, designed to be a ‘blueprint to achieve a better and more sustainable future for all’ and intended to be achieved by 2030,” Dixson said.
While impact investment is heavily populated by philanthropic capital or private capital, Dixson expressed belief that retail investors or mainstream markets could begin to take greater notice of the segment.
“Perhaps the answer is for impact investing to be regarded not as a discrete activity or asset class, but as an approach that more people, organizations, and governments need to adopt. That could turn the G8 taskforce’s prediction — of a three-pronged 21st-century investment paradigm based on return, risk, and impact — into reality,” Dixson said.
In a recent New York Life Investment Study, 53% of the general population surveyed indicated that they are defined as a “values-driven” investor whose portfolio is highly diversified and has taken action against a brand, divested their portfolio of a company that no longer aligned with their beliefs, or changed the types of products purchased. Additionally, approximately 50% of “values-driven” consumers are open to ESG investing and are likely to discuss ESG solutions with their advisor. The level of social responsibility among “values-driven” consumers is high, which is reflected in their investment attitudes, with 62% saying they will sacrifice some level of return to ensure investments reflect personal social views. Wong noted that the study shows that investors are open to learning more about ESG investing and having discussions with their advisors.
As a way to help investors capture this opportunity, IndexIQ, a New York Life Investments company and a leading provider of innovative investment solutions, has come out with a line of ESG-related ETFs, including the IQ Candriam ESG US Equity ETF (IQSU) and the IQ Candriam ESG International Equity ETF (IQSI), which incorporate CANDRIAM’s industry-leading ESG research and data for the first time in a cost-effective ETF wrapper.
Financial advisors who are interested in learning more about sustainable investments can watch the webcast here on demand.