We believe that many of today's investors are seeking investments that put their hard-earned dollars into ETF portfolios that reflect their convictions about important social issues. They connect most with brands that apply ESG — or environmental, social, and governance considerations — in their daily operations.
Many investors may seek out investor-centric firms that provide advisors with investments that recognize those convictions and values. Some may even expect advisors to help them construct portfolios that achieve this purpose-driven aspect of their investment strategy.
Investors as Employees or Employers
Many investors are either employees or have been socially responsible employers. We believe they may be pursuing ESG-focused ETFs where the underlying securities are from companies that make social labor considerations a top priority.
Our opinion is that the social labor values of the brands found within the ETF portfolio may be just as important to those investors as performance. Some investors are carefully evaluating the actions of individual companies to evaluate the social aspects often found in their labor policies. For many investors this focus on the impact that companies' employment policies have on the wider society may be very important to them.
Every Aspect of Social Labor May Get Examined
ESG investors may probe every aspect of the social labor practices of firms whose securities comprise their portfolios. Those social labor practices could include how and where brands have goods and services produced offshore, what the conditions are in their production facilities, safety practices, and how management implements the company's immigration policies. They may ask a question such as, "Are those practices consistently ethical and showing concern for the well-being of employees, contractors, and their communities?"
ESG investors may also look for companies represented in their investment portfolio to have a workforce that is both diverse and inclusive at all levels. They potentially expect to see employees of different backgrounds and abilities actively contributing to every aspect of business operations and management.
We believe when considering investing in an ESG-based ETF, investors may examine the companies behind its underlying security labor complaint rate as much as its return rate.
Corporate Social Responsibility in Practice
Some ESG investors expect firms they're investing in to have their pledge to ethical social labor practices identified in publicly-available corporate social responsibility (CSR) statements. More importantly, they may desire for CSR to be evident in daily practice at an operational level. For example, how do company executives challenged by negative economic factors handle employees in the name of shareholder value?
These executives are responsible for the “G" in ESG, corporate governance and unethical practices in the leadership that affect employee relations. This may have a financial impact on organizational performance if low morale or poor employee engagement produces weak financial outcomes.
Desire for ETFs Specifically Identified as ESG
We believe that it is not enough for ESG-focused investors to select a few securities that meet ESG criteria but that they may expect ETFs to be designed to tilt toward those securities that reflect their core values around social labor issues.
Our opinion is that it's important for advisors to show investors how the particular ETF they're interested in is purposely weighted based on specific ESG criteria. For many ESG investors it can be serious business and they may see it as part of an advisor's fiduciary responsibility to prove their dedication to the fundamental values behind ESG.
Written in conjunction with Dahna Chandler utilizing Contently. Dahna is an award-winning business and finance journalist who's written for major media outlets for 20 years.
FlexShares STOXX® US ESG Impact Index Fund (ESG) and the FlexShares STOXX® Global ESG Impact Index Fund (ESGG) are passively managed and use a representative sampling strategy to track their underlying index respectively. Use of a representative sampling strategy creates tracking risk where the Fund's performance could vary substantially from the performance of the underlying index. The Funds are subject to environmental, social and governance (ESG) Investment Risk, which is the risk that because the methodology of the Underlying Indices selects and assigns weights to securities of issuers for non-financial reasons, the Funds may underperform the broader equity market or other funds that do not utilize ESG criteria when selecting investments. The Funds are also at increased risk of industry concentration, where it may be more than 25% invested in the assets of a single industry. For ESGG, investments in foreign market securities involve certain risks such as currency volatility, political and social instability and reduced market liquidity. The Funds may also invest in derivative instruments. Changes in the value of the derivative may not correlate with the underlying asset, rate or index and the Funds could lose more than the principal amount invested.
The STOXX® USA ESG Impact Index and the STOXX® Global ESG Impact Index are the intellectual property (including registered trademarks) of STOXX® Limited, Zurich, Switzerland and/or its licensors ("Licensors"), which is used under license. The securities based on the Index are in no way sponsored, endorsed, sold or promoted by STOXX® and its Licensors and neither of the Licensors shall have any liability with respect thereto.