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Climate, Sustainability Among Top ESG Priorities

Global asset allocators are becoming selective with their environmental, social, and governance (ESG) priorities, and that’s a good thing for the related exchange traded funds.

In recent years, more nuanced funds, including those focusing on climate and sustainability, entered the ESG space, further cementing the notion that sustainable investing (SI) continues gaining mainstream momentum. That group includes the SPDR MSCI USA Climate Paris Aligned ETF (NZUS).

NZUS, which tracks the MSCI USA Climate Paris Aligned Index, debuted in April, and while it’s a new ETF, it’s also a relevant ETF.

“The majority (86%) of asset owners globally are implementing SI in their investment strategies, compared to 76% in 2021. In APAC, this number rises to 97% of asset owners who are currently implementing or evaluating SI considerations into their strategies,” according to a FTSE Russell study. “Two in five (44%) are currently considering how to incorporate climate or sustainability within SAA models or frameworks (24% already do), whilst one in four (24%) are using climate/sustainable indexes within models and frameworks.”

Part of the allure of an ETF such as NZUS is sustainable investing being a long-term strategy that asset allocators are increasingly realizing reduces risk. Experienced investors know that over the long haul, lower risk often corresponds with higher returns.

“Asset owners that are implementing and evaluating SI are motivated by risk management, with 57% of all asset owners admitting that mitigating long-term investment risk is a key factor. Avoiding reputational risk is 19% points less likely to be a motivator for asset owners in 2022 – falling from 57% in 2021 to 38%,” added FTSE Russell.

NZUS holds 295 stocks from 10 of the 11 GICS sectors with energy, not surprisingly, being the exception. The ETF’s easy-to-understand methodology is notable at a time when professional investors are clamoring for more clarity and data on exactly what constitutes sustainable investing.

“The number one barrier to increased SI adoption across asset classes is concerns about availability of ESG data and the use of estimated data (50%). Lack of standardization in ESG data, scores and ratings, and concern about the lack of quality or consistency of corporate reporting and disclosures follow in joint second (41%),” noted FTSE Russell.

Components in the NZUS index are engaged in the fight against climate change and the recommendations of the Taskforce on Climate Related Financial Disclosures (TCFD).

For more news, information, and strategy, visit the ESG Channel.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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