Using ESG as a Core Investment Option

Posted by FlexShares on Oct 2, 2017 9:38:18 AM

bigstock-Cross-Section-Of-Sphere-54377012.jpg

We believe that one of the biggest challenges financial advisors often face with ETF investors is the latter's belief that ESG investing only needs to be a small part of their portfolios. Often, they're unconvinced that ESG is an optimal core option, preferring other more “traditional" choices.

But in 2016, more than $8.1 trillion was invested into various ESG strategies, an amount that's equivalent to one-fourth of all investments professionally managed in the U.S. [1] That number suggests to us that ESG investing may be growing in popularity and advisors would be wise to understand this development.

Given this trend, we believe it's essential that your ETF investor clients recognize the advantages of considering ESG as a core option within their investment portfolios. Here are the reasons you can share to show them why ESG-centered investing is so important:

ESG investing can be tied to core values

The environmental, social, and governmental ethics that influence an investor's other financial decisions and goals may also impact their investment choices. Show clients that ESG investing is often principles-driven, and affirm that many of the best providers respect their clients' desires to invest based on their core values.

ETF providers know that ESG investing can mean incorporating into one's portfolio those companies that consistently operate in ways that many investors feel don't hurt society. Such companies historically have actively applied consistently strong ESG values.

Show your clients that your ETF provider has funds that are designed to be structured based on performance metrics in those areas. That way, we believe that they will be confident that they're investing in a way that is consistent both with their guiding convictions and their financial goals.

Investors can vote with their dollars

Your investors can choose ETF portfolios comprised of shares that get measured against a company's ESG practices. We believe that the best ETF providers choose companies that exhibit ESG scores that demonstrate that they are ESG leaders, or “best in class."

These scores may allow your ESG investors to vote with their investment funds based on the ETF's composition. For investors, it's a way they can send a powerful message to companies to correct their performance in areas where they believe they are failing to make the ESG grade.

The right ESG ETFs can be strong performers

Often, we believe that investors worry that ESG ETFs can't be high performers. This is often because of their past experience with socially responsible investing (SRIs). However, our opinion is that ESG investing is fundamentally different, and it's important for financial advisors to convey the reasons why.

The SRI investment strategy concentrated on outright exclusion of large equity classes based on the perceived morality of the industries where their enterprises operated. That reduced SRI portfolio performance.[2]

The FlexShares STOXX® US ESG Impact Index Fund is designed to be industry agnostic. It looks at individual company characteristics that allow inclusion of top performing companies in the portfolio. While firms may not do as well in one ESG area, their overall score may show enhanced performance in other areas. That may lead to a more balanced approach in constructing portfolio and, we believe ultimately, to better returns.

That's because we believe that companies included in an ESG ETF may be stronger marketplace performers. They practice environmental, social, and governance principles that may help them attract the best talent, including leaders. As a result, we believe that such companies tend to pursue more principled decisions and higher quality products or services, meaning potentially increased revenue and returns for ESG investors.

Investors want advisors to be well-informed

Today's investors want superior information available to them to make informed decisions about their investments, which provide capital to the companies whose shares underlie their portfolios. They want to know they're making good choices for their money and society.[3]

We believe that if you want your ETF clients to make ESG a core option, you'll have to educate them consistently. Be ready to tell them how ESG investing benefits them and how the ETF provider supports them. Show them the resources they'll have available to help them evaluate ESG ETFs to help them in their efforts to be consist with their core values.

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.

New Call-to-action

 


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.


[1] Aaron Levitt, "Why Is Socially Responsible Investing Generating so Much Interest?", ETFdb.com, May 16, 2017, http://etfdb.com/etf-education/why-esg-investing-generating-much-interest/.

 

[2] Gustke, Constance. CNBC “Trading the World. 16June2017. https://www.cnbc.com/2017/06/16/how-to-win-in-socially-responsible-investing-dont-exclude-bad-stocks.html

[3] CFA Institute. From Trust to Loyalty: A Global Survey of What Investors Want 2016. https://www.cfainstitute.org/learning/future/getinvolved/Documents/trust_to_loyalty_executive_summary.pdf

Tags: ESG

                      New Call-to-action               

Recent Posts