ESG has yet another catalyst.
As calls for social justice in light of the police killing of George Floyd shine a spotlight on racial inequality in Corporate America, they could fuel interest in ESG, a catch-all term for investments focused on companies that score highly on environmental, social and governance factors, exchange-traded fund researchers told CNBC’s “ETF Edge” on Monday.
“What you want is so much money chasing those good factors that the corporates themselves want to project better factors and behave better,” said Phil Mackintosh, Nasdaq’s chief economist.
“Once you get that, you start to get people buying the stocks because they’ve got good governance or good social or good environmental policies and that’s what you really need,” he said.
But while there are ESG-based ETFs that focus on promoting racial and ethnic diversity, such as the Impact Shares NAACP Minority Empowerment ETF (NACP), investors shouldn’t assume all ESG funds have the same priorities, said Dave Nadig, chief investment officer and director of research at ETF Trends.
“These aren’t one-size-fits-all products,” Nadig said. “Some of these funds are very much market-like with small tweaks.”
In other words, some ESG funds’ goals are to mirror their benchmark indices as closely as possible while excluding only their lowest-scoring companies, which might not be the selectivity some buyers are seeking, Nadig said.
“Some of them are very, very specific to women in governance or very specific environmental causes,” he said. “So, I think the important thing is the interest is there. We’re seeing the flows for the first time. And like everything else, you really have to do your homework, whether you’re an advisor or an investor, to understand whether the values you’re trying to project through your investments are actually captured in that strategy.”
The NACP ETF is down just over 1% year to date versus the S&P 500’s nearly 6% loss.