The rollout of innovative investment strategies continues to stand out as one of the many great attributes of the ETF industry. From asset allocation, and fundamental, technical and tactical index weightings to 21st-century themes that include cybersecurity and social media, ETFs are leading the asset management industry in innovation while responding to investor demands.
Environmental, social and governance (ESG) investing — also referred to as socially responsible investing (SRI) or impact investing — is one such area that has garnered a good deal of focus, particularly for its placement among various indexes. A flurry of index development announcements and ETF product registrations have targeted various asset classes and investment strategies with an ESG filter. From my own experiences developing one of the first actively managed impact investing ETFs (in conjunction with Philippe Cousteau, Jr. and the GlobalECHO Foundation), I know ETF providers and investors will discover a challenge as they shift from an environment where stocks can be sliced and diced in so many quantitative ways to a thoughtful forum populated with differing views and opinions on what qualifies as ESG.
Some cynics have opined that they do not view the world’s largest producer of smartphones and tablets as an ESG company due to the paper and plastics used to package its most popular products. However, a strong contingent of sustainable advocates believes that the company’s focus on renewable energy use in the United States, its recycling programs and carbon credits qualifies it as being very “E” as it relates to ESG.
Other detractors argue that overseas labor issues with contractors may trigger a lower score in the “S” department, but that can be countered with its industry-leading employment equality policies in the U.S. A firm’s ESG qualifications ultimately boil down to one individual’s standards versus another’s.