Gone are the days when ETF issuers and investors used to consider market-cap oriented, dividend paying or style-based products. The industry has been expanding fast lately, resorting to smarter approach and widening into new markets and niches. Amid the whole bunch of newer themes, socially relevant funds are in vogue lately (read: Thematic ETFs: Smarter Than Regular Smart Beta ETFs?).
Companies that focus heavily on environmental, social and governance (ESG) practices are being craved by investors, if we go by BlackRock. No wonder, issuers have flocked to this emerging concept and are rolling out new products with full enthusiasm. Renowned issuers like iShares, Barclays and ALPS have already made their presence felt in this category (read: Oppenheimer to Add Revenue-Weighted Feature to ESG ETFs).
Inside Socially Responsible Investing Theme
Equities that are associated with social factors like low carbon emissions and righteous business practices come under the socially responsible theme. On the other hand, companies engaged in the manufacture and sales of products like tobacco, alcohol and arms are not considered by many as socially responsible investment options.
As per the latest data by Morningstar, 70% of all investors are interested in socially responsible investing, while more than 80% of millennials intend to be socially responsible while making investment decisions.
And with millennialsseemingly being the growth driver of the U.S. economy, outpacing baby boomers in 2015 and comprising over one quarter of the nation’s population, their investing preferences are sure to be at the top of issuers’ minds (read: Millennials ETFs Head-to-Head: MILN versus GENY).
Why is it a Surging Segment?
Investors appear to be bothered about the future of the environment and the effect it might have on their investing portfolio. For example, since apprehension about the death of natural resources has urged global superpowers to boost clean energy and reduce carbon emissions, investors believe that stocks with higher ESG scores will eventually outperform (read: Sustainable ETFs Gather Momentum: What's Behind the Surge).
Apart from the social standpoint, this investing practice has a valid reason for increased gains. As per the source, lesser focus on environmental issues by the companies may result in lawsuits, fines, and damages.
For example, “businesses that use less water and less power have lower costs and operate more efficiently.” In most cases, it has been seen that sound corporate governance leads to greater corporate durability. As a result, more companies are coming up with information on their economic, environmental and social events unlike what we have seen in the 1990s.
If this was not enough, in 2015, the Department of Labor issued a new rule that indicates that fiduciaries can consider ESG issues in investment for retirement plans.
How Successful is the Investment Proposition?
As per Journal of Sustainable Finance & Investment, roughly 90% of studies show that there is a nonnegative relation between ESG and Corporate Financial Performance (CFP). A Morgan Stanley 2015 research shows that “in 2012, $1 out of every $9 of US assets under professional management was invested in some form of sustainable investment, primarily in public equities. In 2014 that number increased to $1 out of every $6.”
The Morgan Stanley report also found that long-term annual returns of the MSCI KLD 400 Social Index consisting of firms heavy with environmental, social and governance criteria beat the S&P 500 by 45 basis points till 2014 since its inception in 1990.
ETFs in Focus
Below we highlight a few popular socially responsible ETFs that could be on investors’ wish list.
iShares MSCI KLD 400 Social ETF (DSI - Free Report)
The $624-million fund looks tomeasure the performance of U.S. companies with positive environmental, social and governance characteristics. The fund charges 50 bps in fees. IT (26.64%) and Health Care (13.59%) are the top two sectors.
iShares MSCI USA ESG Select ETF (KLD - Free Report)
The $419.3-million fund measures the equity performance of large cap companies having positive environmental, social & ESG characteristics relative to their industry & sector peers and in relation to the broader market, while exhibiting risk & return characteristics similar to the MSCI USA Index. The fund charges 50 bps in fees. Here also, IT (24.44%) and Health Care (15.44%) take the top two positions.
iShares MSCI ACWI Low Carbon Target (CRBN - Free Report)
The $286.5-million fund looks to give exposure to developed and emerging market equities with a lower carbon exposure than that of the broader market. The U.S. takes the top position with about 50.73% weight while Japan (7.99%) and U.K. (5.64%) occupy the next two spots. The fund charges 20 bps in fees (read: Support the Environment and Profit with Fossil Fuel Free ETFs).
SPDR SSGA Gender Diversity Index ETF (SHE - Free Report)
The $272-million fund looks to track the performance of U.S. large cap companies adopting gender diversity in their senior leadership positions. The fund charges 20 bps in fees. Health Care (20.03%), IT (15.66%), Industrials (13.16%), Consumer Staples (12.31%) and Consumer Discretionary (11.94%) hold double-digit weight in the fund (read: Successful ETF Launches of Q1).
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