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ETF Strategies to Access the Growing ESG Opportunities

Investors should take a look at exchange traded fund strategies to help capitalize on the potential benefits of environmental, social, and governance investing in the current market.

In the recent webcast, Beyond the Backlash: Why ESG Matters More Than Ever, Michael Andeberhan, ESG investment strategist at State Street Global Advisors, highlighted the growing importance and increased focus on ESG investing across the globe as more investors become aware of the potential benefits of socially responsible investments.

Andeberhan explained that incorporating material ESG factors alongside traditional financial metrics can improve returns over the long term and help mitigate future risks. Adoption has increased alongside improving ESG data quality and availability in recent years, as has the number of companies reporting on ESG metrics. Many governments are also enacting new regulations specifically addressing ESG and climate risks, and such regulations are expected to be adopted more widely across the globe. Additionally, the impact and risk of climate change are increasingly becoming more visible as details surrounding corporate ESG incidents are also becoming more visible and increasingly threaten profitability.

As investors look for ways to invest in the socially responsible theme, Andeberhan underscored five overarching investment themes, including exclusion/negative screening, positive screening/best-in-class, ESG integration, thematic, and impact. Exclusion/negative screening follows the exclusion of specific companies, sectors, or countries based on ESG factors or risks. Positive screening/best-in-class incorporates investment in sectors, companies, and countries selected for strong ESG performance relative to universal or industry peers. ESG integration includes a systematic and explicit inclusion of material ESG metrics into traditional investment analysis and decision-making processes. The thematic approach invests in specific ESG themes, such as climate/carbon or gender diversity. Lastly, impact investing makes targeted investments intended to address specific social and/or environmental concerns.

At State Street Global Advisors, Andeberhan explained that they have been proactively addressing diversity and inclusion directives.

“To ensure companies are advancing racial and ethnic diversity, equity, and inclusion, we have introduced new voting policies and disclosure expectations to drive accountability and progress,” Andeberhan said.

For example, “we’re continuing to elevate our gender diversity guidance and voting policies to hold companies accountable,” Andeberhan added, pointing out that 948 Companies (approximately 60%) have now added a female director to their board globally as of March 2022.

Additionally, in 2022, SSGA will take voting action against companies that fail to provide sufficient disclosure in accordance with the TCFD recommendations. They will continue to engage companies on climate with a focus on understanding companies’ plans and progress toward long-term climate goals.

Looking ahead, Michael Arone, chief investment strategist at State Street Global Advisors, also argued that the markets may find potential relief for international stocks as the tightening cycle matures, with a particular emphasis on small-cap fundamentals that remain sound with added ESG analysis.

Moreover, in the fixed-income segment, Arone underscored the potential attractiveness of municipal bonds, which have been relatively better priced than other government debt on an after-tax basis.

To help investors better access the various global market opportunities with an ESG approach, investors can turn to options like the SPDR S&P 500 ESG ETF (EFIV), SPDR S&P 500 Fossil Fuel Reserves Free ETF (SPYX), SPDR MSCI USA Climate Paris Aligned ETF (NZUS), SPDR S&P SmallCap 600 ESG ETF (ESIX), SPDR Bloomberg SASB Developed Markets Ex US ESG Select ETF (RDMX), and the SPDR Bloomberg SASB Emerging Markets ESG Select ETF (REMG) for domestic and international equity market exposure with an ESG tilt.

In addition, investors can use something like the SPDR Nuveen Municipal Bond ESG ETF (MBNE) and the SPDR Bloomberg SASB Corporate Bond ESG Select ETF (RBND) to access fixed-income options that screen for ESG principles.

Financial advisors who are interested in learning more about ESG investments can watch the webcast here on demand.

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