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 Greg Lessard, founder and president of Aspen Leaf Partners, a registered investment advisor (RIA) in Golden, Colorado.
Modern-day socially responsible investing looks a lot different than it did just a decade ago.
Investment managers today regularly look at environmental, social and governance (ESG) criteria when selecting investments. Rigid exclusionary tactics of eliminating entire industries are being replaced by a positive overweighting methodology. Product providers are licensing ESG-branded indexes with increasing popularity.
Just a few years ago, it was impossible to build a diversified ESG portfolio with index funds, let alone ETFs. An investor was forced to purchase individual stocks or conventional ’40 Act mutual funds. That is changing, quickly.
MSCI alone has already developed 11 ESG indexes, and ETF powerhouses like iShares are bringing these indexes to the market. For investors seeking low cost, tax efficiency and ESG values, a globally diversified portfolio is now achievable.
ESG And Performance
To be clear, applying ESG criteria does not increase risk and stifle performance. It’s just the opposite.
In 2012, Deutsche Bank Group analyzed more than 150 academic studies and research papers covering sustainable investing. It found that 89 percent of the studies showed that corporations with high ESG ratings also demonstrated market-based outperformance. More recently, MSCI examined ESG “tilt” and “momentum” strategies. The strategies outperformed their conventional benchmarks by 1.1 percent and 2.2 percent, respectively.
The academic research on stock ESG criteria is spilling over to the indexes’ ESG-branded ETFs track. This chart represents data from 10/1/2007 through 6/30/2015.
For a larger view, please click on the image above.