The 'ESG' Umbrella Has Leaks

March 13, 2018

Defining ‘Social’

Under this umbrella, one could lump all sorts of funds, which either internally have rules designed to achieve a desired societal or cultural outcome, or which, by their very nature, may fit a particular world view. But historically, the “social” part in ESG is not the part most companies are targeting with their efforts.

 

 

Defining Socially Conscious

Simply put, there’s far less consensus for what it means for a firm to be “socially conscious” then there is for it to be “environmentally conscious.”

Probably the easiest-to-understand category of “socially conscious” funds are those designed to be compatible with a particular religious viewpoint, like the Inspire 100 ETF (BIBL), or the Global X S&P 500 Catholic Values ETF (CATH), which explicitly invest based on Christian biblical principles. But there are many, many ways to think about this kind of investing (we track over 65 funds that broadly wedge into the theme).

Some of these conveniently label themselves “ESG” in the title, but a lot of them don’t, and whether or not a given fund belongs in this “social” bucket says more about you than it does about the funds in many cases.

ESG Blind Spots

Global warming on your mind? Then funds like the Guggenheim Solar ETF (TAN) or the PowerShares Cleantech Portfolio (PZD) will be on your list. But those funds aren’t explicitly trying to change the world with investment dollars, they’re just subindustry funds.

Maybe, for you, it’s about geopolitics. In that case, the WisdomTree Emerging Markets ex-State-Owned-Enterprises Fund (XSOE) will be top of mind.

And of course, there are plenty of funds that seek to simply reward good corporate citizenship, whether it’ companies that are proactively “doing good” or simply companies that are seen to “do no harm.”

These funds range from those targeting companies with strong diversity (the Barclays Women In Leadership ETN (WIL)) to those focused on firms pursuing the U.N. Sustainable Development Goals (the iShares MSCI Global Impact ETF (MPCT)).

Alphabet Soup?

One of the great things about ETFs is that they make dissecting investments easier. Because so many ETFs are index-based, they naturally lend themselves to a neat and orderly classification.

That’s why Elisabeth Kashner from FactSet and I had so much fun developing the ETF Classification System that drives our ETF Finder.

But reality, as always, is pretty messy, and in corners of the market like “ESG” investing, we can become captive to our own acronyms and structures.

There’s not actually any logical reason why a fund investing in industrials and tech firms focused on solar panels belongs in the same bucket as a fund focusing on veterans, or focusing on labor standards, but that’s where the global investment management industry has ended up.

This year, I want to focus on tearing apart these overbroad buckets. We’ll start next week in a one-hour session with InsightShares’ Richard Cea to dig deep into the “S” in social, and look at how different social “factors” can have a pretty dramatic effect on your portfolio. I hope you’ll join us. Click here to register.

You can reach Dave Nadig at [email protected].

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