ESG (environment, social and government), SRI(Social Responsible Investment) are resounding buzz words in the financial arena in recent years as more and more investors raise their social consciousness level and want to apply this philosophy to their asset allocation. Quite a number of them even are willing sacrifice certain return for the needs of their ethical responsibility. There are controversial thoughts about the profitability of socially responsible stocks versus non-socially responsible companies. Some argue that responsible firms will sustain in the long term and eventually give back better returns to investors, the others think differently, stating non-responsible firms are less constrained by rules, and willing to partaking “filthy” business such as gambling, marijuana, to glean quick and sizable profits for their investors.
Certainly, there are ways to select true ESG stocks with considerable growth/return trait for investors. A wide range of such ETFs is already available in the market and more are under the development. DSI, CRBN, and KRMA are three representative ones with a good amount of AuM amassed.
DSI, iShares MSCI KLD 400 Social ETF, issued in November 2006, has $836 million assets. It tracks MSCI KLD 400 Social Index, consisting of 400 companies selected from the MSCI USA IMI Index. These 400 companies are sifted through three ratings from MSCI ESG Research – MSCI ESG Intangible Value Assessment (IVA), MSCI ESG Impact Monitor, and MSCI ESG Business Involvement Screening Research. MSCI ESG IVA rates how well companies manage their most material environmental, social and governance risks and opportunities via a seven-point scale from ‘AAA’ to ‘CCC’. The involved products include Alcohol, Gambling, Tobacco, Military weapons, Civilian Firearms, nuclear power, adult entertainment and genetically modified organisms. MSCI ESG Impact Monitor assesses controversies concerning the negative environmental, social, and/or governance impact of company operations, products and services. it’s designed to be consistent with international norms represented by the UN Declaration of Human Rights, the ILO Declaration on Fundamental Principles and Rights at Work, and the UN Global Compact. Impact Monitor overall company scores fall on a 0-10 scale, with “0” being the most severe controversy. MSCI ESG Business Involvement Screening Research (BISR) enables institutional investors to manage environmental, social and governance (ESG) standards and restrictions reliably and efficiently.
CRBN, the iShares MSCI ACWI Low Carbon Target ETF contains 1148 holding companies, launched at the end of 2014 by BlackRock, and has since mounted to $392.52 million assets. It tracks MSCI ACWI Low Carbon Target Index, designed to address two dimensions of carbon exposure – carbon emissions and fossil fuel reserves. MSCI ESG Research collects company-specific direct (Scope 1) and indirect (Scope 2) greenhouse gas emissions data from company public documents and/or the Carbon Disclosure Project. If a company does not report GHG emissions, then MSCI ESG Research estimates Scope 1 and Scope 2 GHG emissions.
KRMA, Global X Conscious Companies ETF, came to market in July 2016, issued by GlobalX, now has $37.8 million assets. KRMA follows Concinnity Conscious Companies Index, Concinnity Advisors; LP has developed a strategy that asserts “well-managed” companies are those that adopt a multi-stakeholder operating system (“MsOS”) as the nucleus for their long-term value creation process. A component must have appeared at least three consecutive years on the MsOS List (“Three Year Repeaters”) in order to be included in the Index.
Now let’s take a look at these ESG ETFs’ performance.