Sustainable investing is an investing discipline that aside from generating attractive returns also focuses on factors like environment, society, and governance (ESG). It focuses on investing in companies that promote environment friendly policies, support human rights, and have ideologies in line with the society’s long-term benefit. 

 

Companies with strong governance principles are generally at lower risk of regulatory hindrance. This generally helps them to attain higher ratings and thus exhibits higher confidence in the company. 

 

However, the real question is, whether it generates investment benefits. Various studies have proved that sustainable practices have led to lower cost of capital and better operational performance of the firm, which in turn has led to higher cash flow generation. To discuss this further, we will now talk about a few ETF investments in this space.

 

iShares MSCI USA ESG Select ETF

 

This fund targets exposure to companies that have strong ESG policies relative to their peers. 

 

It has AUM of $519.07 million and charges a fee of 50 basis points a year. Information Technology, Health Care, and Industrials take the top three spots with 24.85%, 14.20%, and 12.85% allocation, respectively (as of April 10, 2017). 3M (MMM Quick QuoteMMM - Free Report) , Microsoft Corporation (MSFT Quick QuoteMSFT - Free Report) , and Apple Inc (AAPL Quick QuoteAAPL - Free Report) are the top three stocks with 4.48%, 4.47%, and 3.75% allocation, respectively (as of April 10, 2017). The fund returned 13.37% in the past one year and 6.25% in the year-to-date time frame (as of April 11, 2017).

 

iShares MSCI KLD 400 Social ETF (DSI Quick QuoteDSI - Free Report)

 

This fund targets exposure to ESG friendly companies.

 

It has AUM of $804.70 million and charges a fee of 50 basis points a year. Information Technology, Consumer Discretionary, and Health Care take the top three spots with 27.17%, 13.71%, and 12.13% allocation, respectively (as of April 10, 2017). Microsoft Corporation, Alphabet Inc Class C (GOOG Quick QuoteGOOG - Free Report) , and Alphabet Inc Class A (GOOGL Quick QuoteGOOGL - Free Report) are the top three stocks with 5.20%, 2.75%, and 2.68% allocation, respectively (as of April 10, 2017). The fund returned 11.49% in the past one year and 5.07% in the year-to-date time frame (as of April 11, 2017).

 

SPDR S&P 500 Fossil Fuel Free ETF (SPYX Quick QuoteSPYX - Free Report)

 

This fund targets exposure to fossil fuel free companies tracking the S&P 500 Fossil Fuel Free Index.

 

It has AUM of $133.5 million and charges a fee of 20 basis points a year. Information Technology, Financials, and Health Care take the top three spots with 23.07%, 15.03%, and 14.62% allocation, respectively (as of April 10, 2017). Apple Inc, Microsoft Corporation, and Amazon.com Inc (AMZN Quick QuoteAMZN - Free Report) are the top three stocks with 3.94%, 2.65%, and 1.87% allocation, respectively (as of April 10, 2017). The fund returned 13.77% in the past one year and 6.03% in the year-to-date time frame (as of April 11, 2017).

 

Source: Yahoo Finance

 

 

It can therefore be seen that except DSI, the other two ETFs discussed have outperformed the broader market represented by SPY in the past one year. KLD ($19.5 million), DSI ($17.66 million), and SPYX ($14.03 million) have seen positive inflows this year, compared to an outflow of $2.594 billion in SPY (as of April 10, 2017). Studies predict that a large number of investors are looking at socially responsible investing as an option nowadays, and that these policies are bound to have a positive impact on firms in the longer term. 

 

 

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