Nuanced Views On ESG Gain Traction

While broad-based and environmentally focused funds have gathered the bulk of environmental, social and governance assets so far, smaller ETFs that take a more holistic view of ESG factors are beginning to gain traction with investors.

These ETF portfolios can look quite different from traditional benchmarks, but are arguably a more accurate representation of what ESG is meant to be.

The Humankind U.S. Stock ETF (HKND) is one such ETF. Since launching in February of this year, the fund crossed the $100 million milestone in mid-October.

HKND tracks an index that selects and weights U.S. stocks, of any capitalization, based on socially responsible investment criteria. The index is based on Humankind’s proprietary data that determines which companies have the most positive impact on humanity, including investors, customers, employees and members of society.

Quantifying Societal Value

As seen by using the ETF Comparison Tool, the resulting portfolio looks considerably different from that of the iShares ESG Aware MSCI USA ETF (ESGU), the largest domestic equity ETF in the socially responsible category.

Chart courtesy of FactSet

According to data from FactSet, the technology sector makes up a significantly smaller portion of HKND’s portfolio, approximately 16% versus 37% for ESGU. However, many of the top names are in mega-cap growth companies such as Alphabet, Microsoft and Apple.

(Use our stock finder tool to find an ETF’s allocation to a certain stock.)

James Katz, CEO of Humankind Investments, explained this sector’s prominence in the top holdings:  “There’s all this value that tech companies are providing for free to people. It’s a net positive benefit to society. That’s one side of the ledger. We also look into practices of consumer data harvesting [and] internet addiction. When we quantify the size of these impacts, it is overwhelming positive value in our estimation on the side of the ledger of providing all of these free and useful services to people.”

One additional differentiator around this ETF: It was the first investment company to file as a benefit corporation with the SEC. Katz explained what this means: “In the DNA of the fund itself, the mission is to make profits for investors but also to benefit customers, employees and society.”

Active Take On Social Justice

Another ETF that offers its own twist on ESG is the Adasina Social Justice All Cap Global ETF (JSTC). As the name suggests, this ETF has a go-anywhere approach. JSTC is actively managed, investing in global companies that are screened for social justice criteria.

It has an index that it essentially follows, but the firm reserves the right to make immediate changes in response to new information rather than waiting for a rebalance. Since launching in December of last year, the fund has gathered $75 million.

The top holdings in this ETF have no overlap with that of either HKND or ESGU.

Chart courtesy of FactSet

Though the fund’s name suggests a focus on the “S” in ESG, Rachel Robasciotti, founder and CEO of Adasina, feels that the scope is all-encompassing.

“If you dive deeply into the issues of racial, gender or economic justice, you see overlap. Those same communities we're taking our direction from are also sitting at that critical point of being most impacted by climate injustice as well,” she said.

“We have this belief that there's no way you can really be working on climate justice if you aren't working on these other issues,” Robasciotti added. “If you don't have a racial justice lens on it, you're going to miss several things. If you don't have a gender justice lens on it, you just miss too much of it.”

Similar to Humankind, Adasina has created its own index, the Adasina Social Justice Index. Adasina’s investment criteria are established through data sets gathered from community-sourced social justice organizations.

ESG Driving Index Production

Humankind’s and Adasina’s decision to rely on proprietary data to self-index highlights a growing trend the overall increase in ESG-related indices.

The Index Industry Association recently released the results from its fifth annual global benchmark survey, showing a 5% increase in the overall number of indices offered by its member firms. Of this increase, the main driver of index production was the growth in those related to ESG.

This suggests that index providers are seeing potential by slicing and dicing the investment universe in different ways to meet specific ESG metrics.

While self-indexing incurs the burden of research costs for the issuer, socially responsible ETFs are a natural fit for the creation of such indices. Self-indexing allows the manager to build a differentiated index based on their own data, adding value based on their unique definition of what ESG means.

This differentiation and influx of indexes means that issuers like Humankind and Adasina need to be transparent and forthcoming on what metrics are being considered. And these methodologies and investment processes need to be communicated effectively to potential investors.

But growing assets in HKND and JSTC indicates these messages are beginning to resonate with discerning ESG investors who desire a more nuanced take on socially responsible investments. While these ETFs remain small in relation to ESGU, the evolution of ESG and underlying data is something to watch.

Contact Jessica Ferringer at [email protected] or follow her on Twitter