Investing concepts, including environmental, social and governance (ESG) investing, socially-responsible investing (SRI) and impact investing, have become important features of the investment process. A growing number of fund managers now consider ESG attributes as part of their research before taking a stake in a company.
Fund administrators might conduct due diligence on how companies progress towards or comply with various ESG goals, like addressing climate change, resource scarcity or demographic shifts. Funds may also avoid 'sin stocks,' such as shares of tobacco, alcohol, gaming, weapons, adult-theme or cannabis companies.
There are various providers of ESG ratings, including the FTSE4Good Index Series. The FTSE Russell website offers a comprehensive list of indices. The Global 100, on the other hand, lists the 100 most sustainable businesses worldwide. Each data provider typically has a different methodology and criteria for grouping firms. Nonetheless, if a firm tops one list, it usually has a high ranking on others.
Those investors interested in knowing how a company rates in terms of ESG criteria may use the website provided by the MSCI ESG Research. The rating scale extends from AAA (a leader) to AA, A, BBB, BB, B and finally CCC (a laggard).
Companies that have AAA or AA ratings include Cisco Systems (NASDAQ:CSCO), CNH Industrial (NYSE:CNHI), Ecolab (NYSE:ECL), Edwards Lifesciences (NYSE:EW), GlaxoSmithKline (NYSE:GSK), Hasbro (NASDAQ:HAS), NextEra Energy (NYSE:NEE), Microsoft (NASDAQ:MSFT), Orsted (OTC:DOGEF), Owens Corning (NYSE:OC), Prologis (NYSE:PLD) and Workday (NASDAQ:WDAY).
On a final note, there is a similar rating for funds as well.
According to recent research led by Akihiro Omura of Griffith University in Australia, socially-responsive investments have been enjoying high returns during the pandemic. The authors highlight:
"...sustainable businesses improve their social image and are, therefore, able to differentiate themselves and their products from other companies. These companies, in turn, enjoy brand loyalty from customers who value sustainability.... This then translates into higher profitability and reduces the sensitivity of responsible businesses against systematic risk and economic downturns."
With that information, here is a fund that could pique the interest of readers wanting to align investment objectives with their personal values.
iShares MSCI Global Impact ETF
Current Price: $99.11
52-Week Range: $50.42 - $100.27
Dividend Yield: 0.9%
Expense Ratio: 0.49% per year
The iShares MSCI Global Impact ETF (NASDAQ:SDG) provides exposure to global businesses, striving to advance themes related to the United Nation's Sustainable Development Goals (SDG), a collection of 17 aims. Some of the issues addressed by the SDG focus on corporate governance, reducing carbon emissions, health and safety, demographic equality and representation, and access to quality education. These objectives can act as a roadmap for solving some of the urgent problems faced by many global communities.
SDG, which tracks the returns of the MSCI ACWI Sustainable Impact Index, has 120 holdings. The index typically excludes businesses focusing on alcohol, tobacco, firearms, weapons, and predatory lending, i.e., with loans that put borrowers at high risk of default.
The fund started trading in April 2016. Its net assets stand at $405 million. The most important sectors (by weighting) are consumer staples (18.50%), health care (17.75%), industrials (17.46%), consumer discretionary (16.95%) and materials (11.01%). About 40% of the funds are in the top 10 names.
Electric vehicle (EV) darling Tesla (NASDAQ:TSLA); Belgium-based global materials technology group Umicore (OTC:UMICY); UK-headquartered Johnson Matthey (OTC:JMPLY), which provides catalysts to reduce emissions; East Japan Railway (OTC:EJPRY); and Danish Vestas Wind Systems (OTC:VWSYF) lead the names in the ETF.
Over the past year, SDG has returned about 41% and it is up more than 6% year-to-date (YTD). The fund hit a record high in late January. Given the recent run-up in price, short-term profit-taking might soon put pressure on the stocks that comprise the ETF. A potential decline toward the $95-level would offer a better margin of safety for entry.
Bottom Line
Fund managers are increasingly looking at positive ESG characteristics to generate long-term, competitive, financial returns by investing in businesses that create a positive social impact. Many analysts concur the pandemic has provided tailwinds for more interest in socially-responsible investing.
Those investors who believe that investing with a purpose is likely to become even more dominant might also want to research the following funds:
- Barclays Women in Leadership ETN (NYSE:WIL) - up 10.2% YTD
- FlexShares STOXX US ESG Impact Index Fund (NYSE:ESG) - up 19.3% YTD
- iShares ESG USD Corporate Bond ETF (NASDAQ:SUSC) - up 3.04% YTD
- SPDR® SSGA Gender Diversity Index ETF (NYSE:SHE) - up 20.2% YTD
- Vanguard ESG US Stock (NYSE:ESGV) - up 24.6% YTD