ESG's Stealthy Spread Continues

December 27, 2017

Last year I called for ESG investing to be a big deal in the ETF space. I could split hairs like Obi-Wan claiming Luke’s father was dead “… from a certain point of view,” but the truth is, the way we tend to measure success around here is by asset flows, and in 2017, ESG-centric ETFs “only” pulled in about $830 million in assets.

So is that success? In a year where we may close in spitting distance of half a trillion dollars in net new money flooding into ETFs, no, of course not. However, I still think this has been a formative year for ESG. With some 33 dedicated ESG funds now on the market, covering international and domestic equity and fixed income, investors have a lot of choices.

And many of those choices are becoming pretty serious contenders. Consider the iShares MSCI KLD 400 Social ETF (DSI). As I write this, it’s just nudged against $1 billion in assets for the first time, having pulled in almost $100 million in new money this year.

This is core, large/midcap exposure that is a decent, slightly low-beta way of playing the U.S. market that consistently ranks the highest on MSCI’s ESG Quality score (currently 8.23 out of 10). And it’s done this while maintaining corelike performance over the long term, and actually beating the broader U.S. market by about half a percent over the last year. 

 

 

My point is I think that a certain class of investor is catching on that ESG is a core approach to investing, and the products that are out there are proving it. Not a single ESG fund has negative flows for the year so far.

But no, the flood hasn’t happened, despite solid product putting up solid numbers, from DSI to innovative newcomers like Nuveen’s NuShares ESG U.S. Aggregate Bond ETF (NUBD). Instead, I think 2017 has been a foundational year in which the ESG message has been received loud and clear, and where some great research and resources have come on line.

Here are a few of my favorites for your holiday reading pleasure:

ESG101.com

Built by MSCI and launched sometime in the last few weeks, ESG101.com is a phenomenal collection of proprietary and independent thinking on ESG investing, and a great starting point for anyone thinking they want their money to reflect their values, or capitalize on places where ESG factors can actually help mitigate risks.

FactSet High Net Worth Study

Previously dribbled out in blog posts, you can now get the complete eBook from FactSet covering how high net worth investors—particularly younger investors—view ESG investing. This study is the source of countless great statistics, such as “90% of millennials want to direct their allocations to responsible investments in the next five years.”

 

U.S. Trust Wealth & Worth Study

A “must read” for any advisor, regardless of their opinion on ESG, the full report (available as a free PDF) includes a generational breakdown of interest and ownership in impact investing:

 

 

CFA Institute Perception Study

Notable because it looks at CFAs who advise assets rather than the asset owners themselves. There are some great insights into how the smart kids are thinking about ETFs (disclosure: I’m probably either too old, too slow or both to pass the CFA at this point). This study highlighted a few things for me—like the No. 1 reason that ESG use is limited is a lack of available ESG data (precisely the reason we worked so hard to bring MSCI’s ESG data into our ETF screener).

AQR Study

And last but definitely not least, a study for the deep skeptics. AQR isn’t known for letting its emotions drive, well, anything in its investment process. So its deep dive into whether ESG criteria can be meaningful investment factors was much needed. It can be best summarized by the heading to its concluding table: “Better ESG exposures predict lower future risk.”

So How About 2018?

Will 2018 be the year ESG finally “breaks out?”

I think that may be the wrong question. Sure, it’s possible the combination of the political environment, a midterm election cycle, a market pullback and some relative outperformance could make for a banner year in ESG flows, but it’s just as likely we’ll see what we’ve seen in 2017: a slow trickle of long-term flows.

I’d argue that’s probably a good thing. The last thing ESG as an investment theme needs is a “breakout” year. What it actually needs is slow and thoughtful product introduction, a commitment by the industry to investor education, and an eye on risk management for the long term. That’ll be good for investors, and ultimately good for the companies in ESG portfolios.

And isn’t that the point?

At the time of writing, the author held none of the securities mentioned. Contact Dave Nadig at [email protected].

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