ESG strategies for ETF investors

What is ESG investing?

Even if you’ve never attended a course on sustainable finance or ESG investing, you may already be following its principles unknowingly. Perhaps you already recycle your empty beer bottles, use canvas bags instead of disposable plastic bags to buy groceries or drive hybrid or electric cars. Rome was not built in a day! Our new consumption habits are hinting to where financial investments are heading. Here’s what this might mean for you.

ESG investing is as simple as investing money in a company or project that scores well on either Environmental, Social or corporate Governance criteria.

If you sometimes worry about the environment (‘E’), you may want to invest in clean energy stocks or green bonds. If you find yourself advocating about social issues (‘S’), several funds will enable you to invest in related themes such as gender equality. Finally, if you believe that good corporate governance is key for companies to grow – such as having a high proportion of independent board members or a sound company policy against corruption and bribery, you may rank investments by their score on the ‘G’ element. While these simple examples capture the spirit of ESG investing, there’s much more going on behind these three letters. Let’s jump into it.

Realize your ESG beliefs with Exchanged Traded Funds

You might have good intentions to make the world a better place, but you may not have enough time or expertise to research all of the different options. Or maybe you want to invest sustainably in a broad direction, not a specific stock or industry. Investing in ESG Exchange Traded Funds (‘ETFs’) may help you get there.

ETFs are flexible and low-cost products that replicate indices - in other words, they invest with great transparency, in a basket of stocks, bonds, or both. ESG ETFs can replicate ESG indices or use their own ESG strategy. Different ESG concepts apply to different ESG indices. At Trackinsight, we identify four main ESG strategies. Read more about them in our educational guides.

Which ESG strategy is right for you?

If you simply don’t want to invest in the “bad” businesses, such as weapons manufacturers, tobacco companies, or fossil fuel producers, the right strategy for you is Exclusionary. ETFs with this strategy will suit your needs as they screen out the worst companies in a given market. If you don’t have specific country or sector preferences, you may invest in an ETF with a broad market exposure and a “negative” ESG filter. For example, see all ETFs excluding fossil fuels.

If you are hoping to have more impact, a more sophisticated methodology called Full Inclusion could meet your needs. ETFs with this strategy may also include the negative screening, but go a step further and integrate ESG considerations when selecting stocks and their proportion in the portfolio.

The Full Inclusion strategy allows you to invest in your desired market but it will adjust the weights of the stocks to give greater allocation to the ESG leaders and underweight the ESG laggards. In most cases, this approach is a trade-off between getting the market exposure and achieving a better overall sustainability score on your investment. Check our ETF screener to find ETFs with the Full Inclusion strategy.

What if on the opposite, you only want to put your money in companies with the highest ESG scores? Then the Best-in-Class strategy is right for you. ETFs with this strategy compare the ESG scores of the companies in each industry (such as transportation, technology, healthcare) to select only the best. As a result, their portfolio contains the most sustainable companies across all industries. Compare Best-in-Class ETFs in our ETF screener.

Last but not least, perhaps you have a very specific theme in mind when you think about sustainability? For example, you might want to invest in companies that derive their revenues from the clean energy business (such as solar, wind or alternative energy production). In this case, a Thematic ESG strategy is the best fit for you. Unlike the other strategies, this approach has a narrower investment focus, rather than buying the entire market. To find Thematic ESG ETFs, try to searching for keywords like clean energy in our ETF screener.

What people in your region buy – ESG strategies’ distribution worldwide

Even if there are ESG ETFs available around the globe, not all ETFs are available in all regions. The popularity of different strategies somehow varies across different continents.

Whether in terms of the number of ETFs available or assets invested, Europe has long dominated the sustainable market. America and the Asia-Pacific region are striving to catch up. Regarding the four strategies we discussed, from a global perspective, Full integration is the most popular approach, and Best-in-class products are also receiving attention with a considerable market share in the Asia-Pacific region and Europe.

Find the right ESG ETF for you with our new ETF screener, and stay tuned for frequent publications on ESG Observatory.