Aligning investments with your values ETFs are here for you
Thirty years of ETF product development has brought a vast spectrum of options to the market, and similarly, there are many different ways to construct ESG portfolios. istock.com
ESG ETFs? At first glance, it looks like the worst kind of insider-jargon “alphabet soup.” But unroll the acronyms and – for the ever-increasing number of investors concerned with the environmental and social impact of public companies – it’s just an elegant solution.
ESG investing, also known as socially responsible or green investing, has been around a long time, but has been plagued with issues and misapprehensions.
In the “issues” column, comparing and measuring ESG performance has always been problematic, says Mark Raes, head of product at BMO Global Asset Management. “What does ESG mean to you? What does it mean to me? And does that agree with a third person on the street?
“The marketplace is slowly moving towards the conformity of a wider, sustainable approach, and to measurability. We’re starting to see providers offering tangible measurement of the ESG approach itself. ”
“The marketplace is slowly moving towards the conformity of a wider, sustainable approach, and to measurability. We’re starting to see providers offering tangible measurement of the ESG approach itself.”
For example, the UN Principles for Responsible Investing (PRI) has helped by providing a framework of 17 sustainable development goals that asset managers may use to classify investments and identify issues, he adds.
Thirty years of ETF product development has brought a vast spectrum of options to the market, and similarly, there are many different ways to construct ESG portfolios.
“Spending a few minutes to make sure that your investment actually aligns with your personal values is a very important step in the process,” stresses Mr. Raes. “Are you looking for something that is more exclusionary, or are you looking for something where you’re participating in improvement in the marketplace?”
While the earliest ESG funds excluded controversial investments, and many still do, newer options include all sectors and use active ownership to influence company ESG performance. “It’s critical to realize that active and passive investing are similar in that way,” he says.
Driving change has become much more of a focus, particularly in Canada, where mining and energy make up an outsized portion of the overall economy. “Positively impacting the entire marketplace to build better practices and sustainable approaches versus low-carbon investing is a critical decision point,” Mr. Raes notes.
One of the most common perceptions is that aligning investments with social and environmental factors means sacrificing returns, he says, something that is no longer necessarily true. “What we see with today’s ESG investing approach, where it’s far more about improving companies as opposed to excluding them, is that there really isn’t a performance gap.”
Another misconception about ESG investing is an understanding of the effects of measuring these factors, adds Mr. Raes. In other words, it isn’t merely about doing good, but about managing risk. “If we take Volkswagen as an example, investors are waking up to the idea that companies with ESG issues in fact are suffering when it comes to financial performance.”
The transparency, diversification and lower fees long associated with ETFs make all of these considerations less daunting.
Investors also tend to focus on equity investing when considering ESG, which is an oversight, says Mr. Raes. “We’re using ESG ratings to identify corporate issues to invest in. The fixed income side is an emerging space that is going to be just as important going forward – and will evolve further with the issuance of green bonds and other initiatives still in their infancy.”
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