Tuesday , 17 May 2022

What Is ESG Investing? Why Is It Growing? Which ETFs Are Doing Best?

To properly invest in companies that are environmental, social and governance (ESG) factors to inform investment decisions it is important to fully understand the growing importance of ESG investing.

An original article by Lorimer Wilson, Managing Editor of munKNEE.com – Your KEY To Making Money!

Below are 7 reasons for the growing importance of ESG investing, namely:

  1. Consumers are making decisions based on whether, or not, companies are taking ESG considerations into account in their operations and, if so, the extent to which they are, to ensure their purchases will be sustainable.
  2. Governments of 60 countries, representing over half of global greenhouse gas (GHG) emissions, are working towards a net zero future, in which GHG emissions are reduced or offset.
  3. Industries reliant on energy needs from fossil fuels need to account for a much smaller proportion of the global energy mix and, while the shift to renewable energy may pose a challenge for such industries, it’s not too late for companies to transition if we are to achieve the goal of net zero emissions by 2050.
  4. Investors are seeing an unique opportunity to tap into the nascent ESG market given the billions of dollars flowing into the energy transition.
  5. Companies are becoming much more conscious of ESG criteria far beyond the environment.
  6. The investment landscape is changing with the demand for sustainable fixed income strategies also growing rapidly in addition to equities.
  7. Countries are embracing sustainable strategies with the E.U. increasing from 18% in 2018 to 48% in 2020, the U.S. increasing from 1% to 22% and the countries of the Asia/Pacific region going from 0% to 6%, in total, in 2020. Although certain regions are leading the way, overall demand for sustainable funds is expected to continue on this upward trend.

The three core pillars of the ESG investing philosophy are:

  1. Environment:
    • How does a company manage its environmental impact?
    • How much progress has it made in utilizing renewable energy sources?
    • Is it attempting to minimize its carbon footprint?
    • How does it handle air or water pollution arising from its operations?
    • What is its attitude toward climate change?
    • What about sustainability efforts in its supply chain?
  2. Social:
    • How does the company improve its social impact?
    • Does it offer fair levels of compensation for employees?
    • What are its policies regarding LGBTQ+ equality, racial diversity and inclusive hiring practices?
    • How does a company advocate for social good in the wider world, beyond its limited sphere of business?
  3. Governance:
    • How do management and the board of directors address the interests of the company’s employees, shareholders, and customers?
    • Is executive compensation balanced compared to pay for other employees?
    • How does the company’s board and management drive positive change?
    • Does the board foster diversity in leadership?
    • Are its interactions with shareholders positive?

According to J.P. Morgan Asset Management a full 69% of retail investors are interested in ESG, yet only 10% actually invest in products that incorporate ESG factors, probably because they don’t know how to go about it. If that is your reason for not doing so, check out the munKNEE ESG Index of 11 ETFs below. It identifies:

  • the sectors best performers YTD (Friday, January 21st), in descending order,
  • their individual ESG score (a good ESG rating – the higher the better – means a company is managing its environment, social, and governance risks well relative to its peers. Investors who use ESG ratings to supplement financial analysis can gain a broader view of a company’s long-term potential) and
  • hyperlinks to 2 areas of additional information which are imperative for any individual considering investing in the ESG sector, namely:
    • the fund name, hyperlinked to provide a description of the fund and an analysis of its stock,
    • the trading symbol, hyperlinked to additional financial data and commentary on the company (where available) and
  1. Nuveen ESG Large-Cap Value ETF (NULV): -3.9% YTD; ESG Score: 7.7
  2. Nuveen ESG Mid-Cap Value ETF (NUMV): -5.1% YTD; ESG Score: 7.2
  3. SPDR® S&P 500® ESG ETF (EFIV): -6.7% YTD; ESG Score: 8.4
  4. iShares ESG MSCI USA Leaders ETF (SUSL): -7.2% YTD; ESG Score: 7.5
  5. Xtrackers S&P 500 ESG ETF (SNPE): -7.3% YTD; ESG Score: 6.5
  6. Xtrackers MSCI USA ESG Leaders Equity ETF (USSG): -7.9% YTD; ESG Score: 6.4
  7. iShares ESG MSCI USA ETF (ESGU): -8.5% YTD; ESG Score: 6.5
  8. Nuveen ESG Large-Cap ETF (NULC): -9.0% YTD; ESG Score: 8.4
  9. MSCI USA ESG Select ETF (SUSA): -9.1% YTD; ESG Score: 6.6
  10. Vanguard ESG U.S. Stock ETF (ESGV): -9.8% YTD; ESG Score: 6.8
  11. Nuveen ESG Large-Cap Growth ETF (NULG): -14.3% YTD; ESG Score: 6.0

The above 11 ESG ETFs are DOWN -8.5% YTD but were UP +28.8% in 2021, on average, and have an average ESG score of 7.1.

I trust the above information helps you better understand why ESG investing is becoming so important, which ESG ETFs have high ESG scores and how well they are trending in the early days of 2022.

Editor’s Note:

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