This article is part of a regular series of thought leadership pieces from some of the more influential ETF strategists in the money management industry. Today’s article features Benjamin Lavine, chief investment officer for 3D Asset Management.
Investing in strategies built around environmental, socially conscious/social awareness and governance principles (ESG) has gained increased popularity over the last decade as great strides have been made around data collection and standardization.
There are several data providers competing for the “VHS/Betamax” stamp for industry standardization, with Sustainalytics and MSCI emerging as the two primary research providers. The former serves as the data engine for Morningstar’s Sustainability and ESG ratings, while the latter provides ESG data for financial engines like ETF.com.
Our goal is not to advocate for or against ESG-based approaches for asset allocation and investment selection, but to emphasize the importance of understanding what biases are built into an ESG program beyond the direct themes stated in the prospectus or investment policy statement, and where we’d like to see a marrying of ESG and smart beta methodologies.
ESG Investing In A Nutshell
The goal of ESG investing is to maximize participation in companies focused on sustainable business practices while earning competitive returns for their shareholders. It is to better align investment portfolios with client values (source: Investopedia.com).
- Environmental: energy use, waste, pollution, natural resource conservation and treatment of animals
- Social Awareness: labor practices, board and management diversity, working conditions
- Governance: accounting practices, litigation risk, conflicts of interest
Progress has been made by data researchers to more systematically capture and judge corporate practices, and then standardize that data versus peers (e.g., energy sector peer groups). ESG research providers such as Sustainalytics have evolved rating methodologies to focus more on material financial risks, or the degree to which a company’s economic value may be at risk driven by ESG issues.
Fund data providers such as Morningstar and ETF.com subscribe to ESG data researchers to aggregate ESG ratings at the fund level. Funds generally must hold a certain minimum weighted-percentage threshold of ESG-covered companies to receive an ESG fund rating.
Currently, the “ESG fund category” is somewhat nebulous given that ESG can encompass both qualitative themes (e.g., clean energy) and traditional market-based approaches (e.g., the MSCI ESG Indices). Figure 1 is a list of ESG ETFs as categorized by ETF.com. The broad-based market ETFs are dominating overall assets, likely due to low fees and core market exposures.
Figure 1: Top ESG-Focused ETFs
| Ticker | Fund | Expense Ratio | AUM ($M) |
| SUSL | iShares ESG MSCI USA Leaders ETF | 0.10% | 1,600.00 |
| DSI | iShares MSCI KLD 400 Social ETF | 0.25% | 1,550.00 |
| USSG | Xtrackers MSCI U.S.A. ESG Leaders Equity ETF | 0.10% | 1,490.00 |
| ESGU | iShares ESG MSCI U.S.A. ETF | 0.15% | 1,160.00 |
| ESGD | iShares ESG MSCI EAFE ETF | 0.20% | 1,030.00 |
| SUSA | iShares MSCI USA ESG Select ETF | 0.25% | 1,030.00 |
| ESGE | iShares ESG MSCI EM ETF | 0.25% | 694.01 |
| ESGV | Vanguard ESG U.S. Stock ETF | 0.12% | 620.35 |
| CRBN | iShares MSCI ACWI Low Carbon Target ETF | 0.20% | 482.90 |
| VSGX | Vanguard ESG International Stock ETF | 0.15% | 442.24 |
| SHE | SPDR SSGA Gender Diversity Index ETF | 0.20% | 272.32 |
| CATH | Global X S&P 500 Catholic Values ETF | 0.29% | 265.58 |
| BLES | Inspire Global Hope ETF | 0.61% | 151.74 |
| JUST | Goldman Sachs JUST U.S. Large Cap Equity ETF | 0.20% | 132.38 |
| CXSE | WisdomTree China ex-State-Owned Enterprises Fund | 0.32% | 130.83 |
| ISMD | Inspire Small/Mid Cap Impact ETF | 0.61% | 95.10 |
| ESGG | FlexShares STOXX Global ESG Impact Index Fund | 0.42% | 84.54 |
| LOWC | SPDR MSCI ACWI Low Carbon Target ETF | 0.20% | 83.30 |
| TPLC | Timothy Plan U.S. Large Cap Core ETF | 0.52% | 79.32 |
| BIBL | Inspire 100 ETF | 0.35% | 77.52 |
| TPHD | Timothy Plan High Dividend Stock ETF | 0.52% | 71.08 |
| KRMA | Global X Conscious Companies ETF | 0.43% | 70.82 |
| ESML | iShares ESG MSCI U.S.A. Small-Cap ETF | 0.17% | 62.44 |
| ACSI | American Customer Satisfaction ETF | 0.66% | 59.66 |
| SDG | iShares MSCI Global Impact ETF | 0.49% | 58.89 |
| ETHO | Etho Climate Leadership U.S. ETF | 0.45% | 53.72 |
| ESG | FlexShares STOXX U.S. ESG Impact Index Fund | 0.32% | 51.63 |
| RODI | Barclays Return on Disability ETN | 0.45% | 41.01 |
| WIL | Barclays Women in Leadership ETN | 0.45% | 40.33 |
| MAGA | Point Bridge GOP Stock Tracker ETF | 0.72% | 15.85 |
| SNPE | Xtrackers S&P 500 ESG ETF | 0.11% | 12.87 |
| FRDM | Alpha Architect Freedom 100 Emerging Market ETF | 0.49% | 12.65 |
| CHGX | Change Finance U.S. Large Cap Fossil Fuel Free ETF | 0.49% | 9.81 |
| ACSG | Xtrackers MSCI ACWI ex U.S.A. ESG Leaders Equity ETF | 0.16% | 7.88 |
| TBLU | Tortoise Global Water ESG Fund | 0.40% | 7.70 |
| EMSG | Xtrackers MSCI Emerging Markets ESG Leaders Equity ETF | 0.20% | 7.58 |
| EASG | Xtrackers MSCI EAFE ESG Leaders Equity ETF | 0.14% | 7.50 |
| VEGN | U.S. Vegan Climate ETF | 0.60% | 6.89 |
| WOMN | Impact Shares YWCA Women's Empowerment ETF | 0.76% | 6.34 |
| VETS | Pacer Military Times Best Employers ETF | 0.60% | 4.50 |
| BOSS | Global X Founder-Run Companies ETF | 0.45% | 3.82 |
| KGRN | KraneShares MSCI China Environment Index ETF | 0.80% | 3.61 |
| PRID | InsightShares LGBT Employment Equality ETF | 0.65% | 2.77 |
| IXSE | WisdomTree India ex-State-Owned Enterprises Fund | 0.58% | 2.40 |
| NACP | Impact Shares NAACP Minority Empowerment ETF | 0.76% | 2.17 |
| HONR | InsightShares Patriotic Employers ETF | 0.65% | 1.33 |
| SDGA | Impact Shares Sustainable Development Goals Global Equity ETF | 0.76% | 1.03 |
Source: ETF.com Screener & Database using ESG filter under Features
