The 2022 slump experienced by environmental, social, and governance (ESG) exchange traded funds has a silver lining in that it serves as a reminder that ESG is a style best deployed over long holding periods. Last year provided strong support for that notion, as many of the factors that previously propelled ESG funds fell by the wayside.
Market gyrations, including those that pinch ESG equities, highlight the utility of broad-based, core-type ESG strategies such as the Calvert US Large-Cap Core Responsible Index ETF (CVLC). With a favorable fee and the application of an ESG overlay to a lineup that’s close to what’s found in basic pure beta broad market funds, CVLC has favorable traits for patient ESG investors.
There’s value in long-term investing and its applications to ESG. Consider some of the points made by California State Teachers’ Retirement System (CalSTRS) chief investment officer (CIO) Christopher Ailman in an interview with Simon Brewer of the “Money Maze Podcast.”
Ailman discussed the importance of a company’s durability because the $300 billion CalSTRS -- one of the largest public pension funds in the U.S. -- invests over lengthy time horizons.
“I’m long term. I don’t care about 91 days,” Ailman said in the interview, referencing public companies’ quarterly earnings reporting cycles. “I want them to succeed three years, five years, 10 years."
Ailman went on to discuss instances of companies that are at least a century old that ultimately collapse because they don’t evolve with the times. Anything can happen, and age isn’t a guarantee of corporate success, but the CVLC roster is full of well-seasoned firms, including Procter & Gamble (NYSE: PG), Pepsico (NASDAQ: PEP), and Coca-Cola (NYSE: KO).
By any definition, those are “old” companies, but their inclusion in a fund such as CVLC implies that ESG is a priority and that they possess the flexibility needed to adjust to a new, more values-based investing regime.
“How a company behaves and makes its money. I want them to make money, but how they make their money. I want it to be very long-term,” Ailman told Brewer. “I don’t want them to cut corners for short-term profit. That doesn’t do me any good.”
In many cases, there are some upfront costs, not necessarily large, involved with a company bolstering its ESG credentials. Some CVLC member firms have already made such commitments and continue doing so, indicating that they take avoidance of ESG-related controversies and risk mitigation seriously. Those are commitments that can pay off for long-term investors.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.