The concept of environmental, social and governance (ESG) investing grew out of the social aspect, which allows investors to use their money to effect change.
ESG investing was first known as socially responsible investing, and some people in ESG finance trace the roots of social impacts to the late 18th-century Quakers boycotting sugar on moral and economic grounds to oppose slavery.
Jay Jacobs, head of research and strategy at Global X, which issues the Global X Conscious Companies ETF (KRMA) and the Global X S&P 500 Catholic Values ETF (CATH)—the latter of which is one of the largest socially focused ESG ETFs, with more than $300 million in assets under management—regards the social pillar as one of the most important parts of ESG.
“When you think about the feel-good story about aligning people’s investments and their personal beliefs, a lot of that’s coming from the ‘S,’” he said. “But it’s also where you have the widest divergence of opinions.”
Tough To Quantify
Despite “social” being the foundation of ESG, this pillar has the hardest aspects to quantify, especially in investments like ETFs. Unlike the “E” and “G” in ESG—which have more transparent and measurable metrics for gauging impact—“S” still has challenges, says Michael Lohmeier, chief investment officer of Impact Community Capital, which uses securitizations for private investment in affordable housing.
“Measuring impact in “S” for companies can be more difficult, often due to a lack of transparency and standardization,” he explained. “A company’s product, service and operating environment will dictate what material impact it might have on ‘S,’ but it may be different, potentially, for each company.”
Despite the difficulties, there are ETFs that prioritize the social aspect of responsible investing, versus broad-based ESG ETFs, and fund issuers are using diverse methodologies to achieve these goals.
Getting Priorities Straight
Ethan Powell, founder of Impact Shares and issuer of two ESG-focused ETFs—the Impact Shares YWCA Women’s Empowerment ETF (WOMN) and the Impact Shares NAACP Minority Empowerment ETF (NACP)—notes fund issuers first need to decide what social policies and impact they want to achieve.
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“We wanted to be very explicit with the social aspect we want to address,” he noted.
In its alliance with the NAACP, the fund company worked with the organization on how the group thought it was best to compile and analyze the public and private data available, and what the organization wanted to emphasize.
Powell says that, sometimes, investors take issue with certain companies included in the funds, using NACP as an example. Some mission-aligned investors have a “negative, visceral reaction,” he says, to having companies like Microsoft or Amazon in the fund, which these investors say are two companies that are underrepresented from a diversity standpoint regarding board makeup and corporate leadership.
He counters that critique, noting these two companies have adopted the Rooney Rule, which is a National Football League policy requiring league teams to interview ethnic-minority candidates for heading coaching and senior positions, and they are taking steps in the right direction in the technology sector.
Noel Archard, global head of SPDR product for State Street Global Advisors, says the firm looks at ESG in two ways: “There’s the value aspect, meaning, do any of the data points within the ‘E,’ the ‘S’ and the ‘G’ actually help you from a risk/return investment perspective?”
Then there’s the values lens, where social issues are part of the investment scheme, he notes. “Ideally, you’re solving for the value, and you get the values along with that,” he said. “If you do it right, you’re able to address those constituents.”