Environmental, social and governance (ESG) exchange traded funds (ETFs) make sustainable investing easy for investors. These are umbrella terms used to describe various ways to incorporate ESG factors into the investment process. It appeals most strongly to investors who want to avoid investing in companies that don’t align with their values. Impact investors are typically interested in making a difference in the world or environment through the companies in which they invest.
What is an ESG ETF?
ESG ETFs cover a wide range of asset classes, sectors and geographies. Some screen out certain ‘controversial’ industries, such as tobacco or weapons. Others may focus on certain themes, such as fossil-fuel-free or gender diversity. These funds also offer many ways to incorporate responsible investment principles into your portfolio. This means you can use ESG ETFs to add many different levels of diversification to your portfolio.
- Climate change: Investing in companies that are fighting climate change.
- Natural resources: Investing in companies that are preserving clean air and water, promoting responsible forestry, etc.
- Pollution and waste: Investing in companies that are reducing or eliminating pollution and waste.
- Human capital: Investing in companies that are hiring and training disadvantaged populations.
- Corporate governance: Investing in companies with strong governance, such as clean accounting.
Environmental
Climate change, natural resources, pollution and waste, environmental opportunities. Companies demonstrate concern for the environment when they choose to reduce their total carbon footprint, use sustainable energy, work in LEED-certified buildings, reduce waste, develop clean tech, and/or give back to environmental causes.
Social
Human capital, product liability, stakeholder opposition, social opportunities. Social responsibility occurs when a company commits to paying living wages, accepting product liability, protecting data, and providing a healthy and safe work environment.
Governance
Corporate governance, diversity, corporate behaviour, transparency. Governance encompasses transparent company ownership and control, diversity, board independence, financial transparency, and ethics.
Conclusion
Investing sustainably has the potential to uncover hidden risks, capture emerging opportunities, and deliver enhanced performance. Climate risk and data security risk, as examples, could be overlooked in traditional financial analysis, but continue to grow as material risk factors and can have a direct financial impact on companies. By integrating ESG considerations into the investment process, investors are better able to assess a company’s long-term risk and return prospects and potentially enhance their portfolios’ risk-adjusted returns.
