Sometimes, social goals fly in the face of other social goals, Powell explains, and fund issuers need to consider that. He pointed to tobacco company Philip Morris International as an example: “Philip Morris is actually very good as it relates to their business practices for African Americans. They have community engagement programs, digital programs that do a lot of [positive] things. The problem is, their flipping product kills the constituent.”
Philipp Aeby, CEO of RepRisk, an ESG data science firm that identifies companies and projects that are exposed to material ESG risks, concurs, suggesting that people may want to consider the company overall when evaluating investments: “With ESG, some companies can have great labor standards or great employee relations, but they may be a polluter.”
Because of their size, large companies inevitably will have conflict issues, Aeby points out, and ESG raters can correct for company size, and benchmark the company to others in the industry to come up with an appropriate assessment. That helps to cut down on “greenwashing,” and investors are becoming more sophisticated regarding companies trying to fluff up their social bona fides.
“People are starting to question asset managers on existing products for their ESG credentials,” Aeby said. “Our job is to see if the company walks the walk.”
Global X’s Jacobs says the metrics a fund provider uses for social can differ. For CATH, it was straightforward, he notes, as metrics were based on the U.S. Conference of Catholic Bishops’ investment guidelines. For KRMA, it was based on how people think about corporate social responsibility, selecting companies that take a conscious approach to how they operate and seek to optimize the outcomes for all stakeholders.
What it comes down to, for both fund issuers and investors, is that both entities have to be very specific with what they consider a social priority, Powell says.
Andrew Behar, CEO of As You Sow, a nonprofit shareholder advocacy group, which also has a website that grades funds on ESG metrics, notes that social metrics lag behind environmental and governance metrics because there’s less data.
“With diversity, it’s hard to rate and rank because it’s illegal to ask somebody their ethnicity, even on boards,” he said. “We don’t know, so we don’t have this in our database; otherwise, we’d include it. You can’t ask board members their sexual orientation.”
Wary Of Social Aspects
Some financial advisors who invest in ESG products remain wary about social investing. Blair duQuesnay, investment advisor representative at Ritholtz Wealth Management, explains they approach ESG from a risk management perspective, making sure ESG isn’t harming portfolio performance: “From that angle, social becomes an add-on after that, based on clients’ values.”
It’s not that her firm isn’t prioritizing social aspects, but for her, social screens are still something akin to the previous way advisors approached ESG, with negative screens eliminating whole industries. Because some social funds are more niche, duQuesnay notes, those can be difficult to figure out how to properly place in a portfolio.
“The question is, what do you do? Is something like the SPDR SSGA Gender Diversity Index ETF (SHE) at the core of a portfolio, or is it a percentage of a portfolio?” she said. “If that’s an issue that’s really important to a client, should it only be a small slice of a portfolio? It’s a very difficult decision when you get into these niche topics.”
While some people may be skeptical about how social impacts are represented in ETFs, that could change. As more data becomes available, methodologies will morph, SSGA’s Archard observes: “The more clients use ESG products, the more sponsors launch ESG products, the more the taxonomy gets defined.”