Sustainability: How ESG investing makes an impact

Did you ever wonder how investing sustainably can have an impact on our economy? How investing in an ESG ETF can help reduce our carbon emissions? There are three channels through which your investment makes a difference. In this article, we go through your options and illustrate how your investments in ESG ETFs can help make the world a better place.

1. Encouraging companies towards more sustainability as a shareholder

When you buy an ETF, you might be buying shares in hundreds or even thousands of companies. As ESG ETFs hold shares of companies and they also have the voting rights associated with the shares, meaning they can participate in deciding important matters on how the company should be run and their strategic objectives or their sustainability processes. As investors, they can directly engage in conversations with the management of those companies and make proposals towards more sustainability.

Even though you are the ultimate receiver of the return of the stocks held by the ETF, you do not have the right to vote directly. It is the ETF provider that will vote on your behalf in those companies’ shareholder meetings. Through their votes, they can help companies transition to more ethical and sustainable business models. You can usually find information regarding voting policies on the ETF providers’ websites. Choosing a fund house with a solid investment stewardship will help you better align your beliefs in ESG with their proxy voting.

2. Public advocacy for a more sustainable market and regulatory environment

The company that manages your ESG ETF can take a public stance and advocate for the improvement of regulations and market practices in the topic of sustainability. You can usually find this information in the media or on the ETF providers’ website. By investing with an ETF provider that is outspoken about its ESG engagement, you are supporting its effort for public advocacy of sustainable matters.

Usually, representative members of the industry such as the biggest ETF and index providers will be invited to the table as regulatory reflect on sustainability issues in asset management. They are the ones which might have the most direct impact on those issues. But smaller providers might also promote their own responsible investment philosophy as well. Don’t stop at the size of the company when comparing ETF providers but instead look out for their alignment with your own ESG philosophy. Your investment might help an ETF provider gain in visibility and reach greater impact on the industry practices as their assets under management grow.

3. The capital allocation effect: hacking companies’ quest for profit for the greater good

The third channel is less explicit. Anyone can wonder how buying and selling stocks on the financial markets actually changes anything in the day-to-day operations of the companies whose shares are traded. It might seem like a completely disconnected activity at first, but it isn’t when you look into it in more detail.

When an ETF says it excludes poorly ESG rated companies in its investment strategy, when they only select the best rated companies, or they allocate a greater proportion of your money towards more sustainable companies, this has a very real impact for those companies.

Long story short, buying shares in a company will help push its share price up. For the company, a higher share price means better access to capital at a lower cost. Access to capital is vital for companies in their pursuit of growth and value creation for shareholders. It allows them to support their business development and secure future growth prospects. Supporting companies that are doing well on a sustainability point of view sends a signal to all companies to improve their sustainability scores.

Much like when you buy an organic product in your supermarket, it sends a signal to all brands to maybe start developing in that direction if they want to maintain their market share and keep growing their profits.

You can find the ESG strategy of your ESG ETF on their fund page on www.trackinsight.com.

Three Channels for Investor Impact

Source: Scientific Beta, Newsletter #33, April 2022

Initiatives such as United Nations’ Sustainable Development Goals can also help you see the impact of your investment more clearly, by selecting an ETF addressing a specific theme such as Climate Action or Gender Equality. Visit our ESG Observatory to find the right ESG ETF for you.