Investors feeling as though they are hearing more and more about the concepts of environmental, social and governance (ESG) and sustainable investing are correct and that's particularly true if they are actively engaged in using exchange traded funds.
ETFs are becoming fertile territory for deployment of ESG as highlighted by a proliferating funds and assets being allocated to those products. As the universe expands, so do the chances that investors will have questions or be downright confused about what sustainable investing encompasses. The chart below provides a basic framework of ESG principles.
Courtesy: Morningstar
Ultimately, many legacy ESG equity ETFs look to avoid companies with significant carbon footprints, gambling companies, manufacturers of civilian firearms, tobacco makers and a few other “naughty” traits. However, some funds, such as the Global X Conscious Companies ETF (KRMA), go even further and those extensions can work in favor of investors.
KRMA, which turns four years old in July, follows the Concinnity Conscious Companies Index and truly extends beyond established tradition in the ESG fund space.
Going Above And Beyond
Proving that it's cut of a different ESG cloth, KRMA employs a methodology that focuses on customers and suppliers, bond and equity investors, communities and workers. Looked at another way, KRMA adheres to an accounting principle known as the triple bottom line (3BL), which blends sustainability and profitability metrics.
“The 3BL serves as a lens for assessing how sustainable a company is and reveals that sustainability considerations and financial value are inextricable,” according to Global X.
Relative to legacy domestic equity ESG ETFs, KRMA's roster is somewhat small with just 161 holdings, which is the result of a stringent screening criteria. Still, the fund avoid holdings-level concentration risk as none of its components exceed weights of 0.84%.
However, KRMA's bar for exclusion is relevant to investors as the types of companies the fund seeks to avoid can be potentially perilous to investors' outcomes. Examples would be BP Plc (BP) and Boeing (BA).
“The examples above highlight extreme negative outcomes that resulted from short-termism, a mindset where achieving short-term profits takes precedence over other considerations,” according to Global X. “Often, short-termism manifests as cost-cutting designed to boost earnings rather than build long-term value. Good governance rejects this idea. Instead, it focuses on being a good steward of shareholder capital by making decisions oriented toward the long term, also known as long-termism.”
Generating Good Karma And Returns
For many investors, the stumbling block to embracing ESG and sustainability is the notion that many of these strategies generate sub-par, long-term returns compared to plain vanilla funds. Good news: many professional investors waking up to the worthiness of ESG.
“The fact that sustainable assets represented 1 in every 4 professionally managed dollars in the US in 2017 says as much,” according to Global X. “Between 2016 and 2018, global sustainable investing assets under management (AUM) grew 34% from $22.8 trillion to $30.7 trillion.”
Better news: since inception, KRMA has outpaced the S&P 500 by about 330 basis points.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Todd Shriber
Todd Shriber got his start in financial markets as a reporter with Bloomberg News. Later, he became a trader at a Southern California-based long/short hedge fund where he specialized in trading sector and international ETFs leading up to and during the financial crisis. He would later become the web editor at ETF Trends. Currently, he analyzes, researches and writes on ETFs for a variety of Web-based publications and financial services firms.Shriber has been quoted in the Barron's, CNBC.com and the Wall Street Journal. His work has been published on Web sites such as Benzinga, ETF Daily News, ETF Trends, MarketWatch, Fox Business and Nasdaq.com.
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