Environmental, social and governance (ESG) refers to the three central factors used in measuring the potential environmental and social impact of an investment in a company or type of business. ESG investing is rapidly evolving from a niche corner of the investment landscape into the mainstream. A+ Investor subscribers have access to predefined ETF and mutual fund screens that seek out funds classified as following a socially responsible approach to investing.
Historically, ESG investing sought to align investors with “moral” issues, excluding certain companies or sectors from a fund or portfolio because of the perception that their business had broader negative implications for society and that businesses shouldn’t be evaluated only from a standpoint of financial return. Tobacco and oil stocks are two common examples.
The field has become quite broad in scope in recent years, encompassing not just screened funds but shareholder advocacy, community investment (deposits at banks, credit unions and other financial institutions whose mission is to serve low- and middle-income communities), as well as targeted “impact” investments in the private markets.
Funds are now actively seeking to include companies or sectors considered to have “best-in-class” ESG performance metrics relative to their industry peers. BlackRock Inc. (BLK), the investment manager behind the iShares exchange-traded funds (ETFs), announced at the beginning of 2020 that it would make a series of moves to account for the long-term ESG risks in its investments. Adopting a tougher stance against the management and boards of companies that don’t disclose environmental risks and ESG plans in line with industry standards, BlackRock said it would double the number of ESG ETFs and increase the assets it manages in so-called sustainable strategies to more than $1 trillion.
Changes such as those made by BlackRock go against the longstanding perception that excluding certain sectors and companies from a portfolio can have a negative effect on investment return and diversification. An increasing amount of research has also countered this notion—particularly for funds that use ESG screens to both include and exclude certain businesses, as opposed to exclusion alone.
In the third quarter of 2020, funds following clean energy and business indexes were the top-three-performing ETFs for the period. First Trust NASDAQ Clean Edge Green Energy ETF (QCLN), iShares Global Clean Energy ETF (ICLN) and VanEck Vectors Low Carbon Energy ETF (SMOG) led with returns of 49.1%, 48.0% and 34.2%, respectively.
A+ Investor predefined ETF (ESG Stock ETFs) and mutual fund (ESG Equity Stock Funds) screens seek out funds classified as following a socially responsible approach to investing. Specifically, they seek socially responsible stock funds with below-average expense ratios. Passing mutual funds have no loads and are also both open and available to individual investors.
The screens are available to A+ Investor subscribers at the respective Funds+ and ETF+ screeners. The ESG screens can also be found in the list of Mutual Fund First Cut Screens and ETF First Cut Screens, under the Screening tab of the AAII.com. These screens can be modified and saved in your list of screens.
