Evolving Principles Changing ESG Space

February 23, 2018

[This article appears in our March 2018 ETF Report.]

When it comes to environmental, social and governance investing with ETFs, financial advisors may use funds that focus on the “e” and the “g,” as those are easy-to-measure financial metrics.

Some advisors may have struggled with understanding the “s” part of ESG criteria, since the success metrics were harder to measure. That’s changing, and it’s giving rise to ETFs with a narrower focus on social principles.

James Lumberg, co-founder and executive vice president of Envestnet, says there are two reasons the ETF industry is starting to see new developments for principles-based investing.

First, greater corporate transparency and reporting allows fund providers to find securities aligned with specific social principles. Second, there’s a growing industry around creating ratings to score ESG criteria, with firms like MSCI and Sustainalytics as two examples.

“These [firms] allow the fund provider to efficiently identify securities that align with whatever level of interest, whether it’s faith-based, social, environmental or governance,” Lumberg said. “With the ability to offer securities based on all of these different metrics, that’s been a very important enabler to the industry.”

Some of these more narrowly focused principles-based funds include the newly launched InsightShares Patriotic Employers ETF (HONR), which has an expense ratio of 65 basis points and $2.5 million in assets under management. It debuted in January and includes companies that encourage veteran workplace participation, based on a “military-friendly employers” list. A percentage of the fund’s revenue is donated to military-supportive charities.

Another, the Workplace Equality Portfolio (EQLT), selects firms that support gay, lesbian, bisexual and transgender employees. It has $20.8 million in AUM and a 75 basis point expense ratio. InsightShares also rolled out its own fund focused on support for LGBT employees in January, the InsightShares LGBT Employment Equality ETF (PRID), which charges 65 basis points and tracks an index that relies on data provided by the Human Rights Campaign.

Rise Of Impact Investing
Impact investing is a growing part of ESG, where funds seek ways to make positive improvements, whether through buying securities in companies that already align with the social interest, or through proxy voting to change or reward good corporate behavior.

Two funds expected to be launched in the first quarter from Impact Shares take a different spin on this concept by working with established nonprofits creating positive social change: the Impact Shares YWCA Women’s Empowerment ETF (WOMN) and the Impact Shares NAACP Minority Empowerment ETF (NACP).

Ethan Powell, founder of Impact Shares, says there are a few reasons the social part of ESG was given the short shrift before. When ESG funds focus broadly on social responsibility, “you really lose a lot of the interest and passion that people have, because no matter how well intended … I may have a different conclusion [on social responsibility] based on what my values are.”

Narrowly focused principles-based ETFs focus on specific social issues. “There’s a presumption that we have a common system of values, and we don’t,” he noted. “Social impact investing is best done when you’re trying to achieve a very
specific social code.”

Powell said his firm worked with the NAACP and YWCA on the social screens in order to maximize exposure to what the groups are trying to achieve, and Impact Shares uses those criteria to create the index methodology. They’re giving all the advisory proceeds back to the groups.

A Christian Lens
Regarding the idea that not everyone’s view of social responsibility is the same, Inspire Investing has launched four ETFs—three equity and one fixed-income ETFs that have a combined AUM of $122 million—with a “biblically responsible” theme. That includes screening out traditional targets such as alcohol and pornography, but also “the LGBTQ lifestyle” and countries that discriminate against Christians, while including companies Inspire says are “doing amazing things like working to cure cancer.”

To ensure adherence to the screens, Inspire uses publicly available data on each company’s primary business activities, products and services to assign a proprietary Impact Score. Inspire donates 50% or more of corporate profits each year to Christian ministry.


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