The Rise Of ESG Investing & Top ESG ETFs To Invest In

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While financial metrics have traditionally been the major criteria for choosing investing opportunities, the consciousness about the integrity and ethics of companies, and impact of their policies on the social and environment ecosystem have begun to change that norm. This is where Environmental, Social and Governance (ESG) investing comes into the picture. There are a rising number of investors who aren’t just looking at the bottom line of companies; they are looking to hold companies to a standard that meets the criteria for ESG investing. They also want to invest in products, such as ETFs, which are screened through the filter of ESG.

Here’s an overview of ESG space.

ESG And The Year 2020

The term ESG was first used in a December 2004 report titled, “Who Cares Wins.” The report spoke about the inclusion of ESG in analysis and decision-making process. It read, “Ultimately, successful investment depends on a vibrant economy, which depends on a healthy civil society, which is ultimately dependent on a sustainable planet.”

Companies across sectors are increasing emphasis towards ESG. A 2020 Fidelity survey pointed out that over 90% of its analysts report that “some or all of the companies they cover are focusing more on ESG, following a pronounced increase in climate change awareness and corporate reforms.”

Many companies have led the way by incorporating ESG in their framework, and they continue making bigger commitments for the cause. During 2020, Salesforce (CRMannounced that it has set a goal to support the conservation and restoration of 100 million trees over the next decade. In early 2020, Microsoft (MSFT) set a target to be carbon negative by 2030, and by 2050 is committed to remove all the carbon from the environment the company has emitted since it was founded. Starbucks (SBUXaims to reduce carbon emissions by 50% by 2030, and plans to conserve or replenish 50% of the water currently being used for direct operations and coffee production. Bank of America achieved carbon neutrality for its operations a year ahead of schedule, and it has been instrumental in the development of green, social and sustainability bonds.

The Scale of ESG Investing

MSCI defines ESG investing as the “consideration of environmental, social and governance factors alongside financial factors in the investment decision-making process.” The current year has seen a new surge of interest in the ESG theme. The total assets invested in the category were reported at $82 billion at the end of May 2020 from $47.33 billion in end September 2019. The year-to-date inflows were recorded at $28.53 billion. Trends suggest that millennials are particularly conscious about ESG factors in their investment decisions.

According to a Morgan Stanley survey, 84% of millennials give importance to the ESG impact. Millennials are poised to inherit over $68 trillion from their predecessors by 2030, which is five times of the wealth they have today. Thus, the millennial ‘approach to investing’ will be an important determinant in the demand for ESG investments going forward.

Top ESG Funds By Size

Here are the top U.S. ESG exchange traded funds (equity) that investors can consider (in terms of size of AUM, in no particular order):

The iShares’ ESG MSCI USA ETF (ESGU), launched in 2016, attracted around $6.7 billion of inflows in the past year and saw its AUM increase more than 30-fold, placing it as the largest ESG ETF with assets to the tune of $7.15 billion.

Launched in September 2018, the Vanguard ESG U.S. Stock ETF (ESGV) tracks the FTSE U.S. All Cap Choice Index by following a passive, full replication approach. The fund has $1.57 billion as assets under management and an expense ratio of 0.12%.

The iShares ESG MSCI USA Leaders ETF (SUSL) tracks the MSCI USA Extended ESG Leaders Index and has a portfolio of around 300 companies. Launched in May 2019, the fund has $2.32 billion as assets under management, and an expense ratio of 0.10%.

Launched in March 2019, the Xtrackers MSCI U.S.A. ESG Leaders Equity ETF (USSG) provides an opportunity to around 300 plus companies in the U.S., which are part of the MSCI USA ESG Leaders Index. It has $2.32 billion as assets under management, an expense ratio of 0.10%.

The iShares MSCI USA ESG Select ETF (SUSA) is benchmarked against MSCI USA Extended ESG Select Index, which is made up of securities of large- and mid-cap U.S. companies, excluding tobacco and civilian firearms involvement. The fund has $1.47 billion as assets under management.

Launched in 2006, the iShares MSCI KLD 400 Social ETF (DSI) tracks the MSCI KLD 400 Social Index. The fund tracks more than 400 companies screened for ESG characteristics. It has around $1.96 billion as assets under management and an expense ratio of 0.25%.

The most commonly held top ten stocks in the above ETFs are Microsoft, Visa, Proctor and Gamble, Alphabet, Amazon, Visa, Apple, Home Depot, Intel, Mastercard, Disney, Salesforce, Facebook and 3M. Outside the U.S., JP Morgan BetaBuilders Europe ETF (BBEU) is one of the biggest funds in the ESG space.

While COVID-19 has accelerated the ESG investment trend, most believe that the increased investor focus on ESG considerations will continue even in post-coronavirus world. ESG is here to stay and will slowly evolve to be an underlying selection criterion.

Disclaimer: The author has no position in any stocks mentioned. Investors should consider the above information not as a de facto recommendation, but as an idea for further consideration. The report has been carefully prepared, and any exclusions or errors in reporting are unintentional. Note: AUM as on July 2, 2020 based on fact sheets.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Prableen Bajpai

Prableen Bajpai is the founder of FinFix Research and Analytics which is an all women financial research and wealth management firm. She holds a bachelor (honours) and master’s degree in economics with a major in econometrics and macroeconomics. Prableen is a Chartered Financial Analyst (CFA, ICFAI) and a CFP®.

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