Potential & Challenge Of ESG ETF Investing

October 01, 2019

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).

  1. Environmental: energy use, waste, pollution, natural resource conservation and treatment of animals
  2. Social Awareness: labor practices, board and management diversity, working conditions
  3. 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

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