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Live From Inside ETFs: The Truth Regarding ESG

On the heels of the SEC considering stricter disclosure requirements for ESG ETFs and Tesla being removed from the S&P 500 ESG Index, a panel at Inside ETFs gave some key players in the ETF ecosystem a chance to defend ESG. Defense was needed because Eric Balchunas, senior ETF analyst and moderator of the panel, asked some tough questions.

Balchunas asked whether index-based ESG investing was really a form of active management that has underperformed recently due to high exposure to technology stocks and low exposure to energy. In response, one of the panelists, Reid Steadman, global head of ESG & innovation at S&P Dow Jones Indices, responded that the S&P 500 ESG Index has indeed outperformed the S&P 500 Index over short- and longer-term periods, but the goal of the index is to provide similar sector and factor exposure. 

The S&P 500 ESG Index is tracked by the SPDR S&P 500 ESG ETF (EFIV) and Xtrackers S&P 500 ESG ETF (SNPE). Year-to-date, EFIV was down 12.4%, while the SPDR S&P 500 ETF (SPY A) fell 12.8%.

However, Jonathan Bauman, senior client portfolio manager at American Century Investments, explained that the ability to have a conversation with a company and understand what it is doing to improve ESG attributes is a benefit of actively managed ETFs. American Century offers ETFs like the American Century Sustainable Equity ETF (ESGA).

Bauman also responded as Balchunas called it hypocrisy that the panelists flew on a plane to attend the conference, thereby using oil while advocating for ESG strategies. According to Bauman, there is no perfect company from an ESG perspective, but companies are making improvements. ESGA’s recent top positions included Apple, NextEra Energy, Prologis, and Tesla.

Balchunas further noted that there has been a recent rise in alternative strategies to ESG, including the BAD ETF (BAD) and the Constrained Capital ESG Orphans ETF (ORFN)

Steadman noted that S&P Dow Jones Indices offers a range of ESG-oriented indexes based on client demand, including the S&P 500 Catholic Values Index, which is tracked by the Global X S&P 500 Catholic Values Custom ETF (CATH ). The index provider is seeking to address the needs of investors, but Steadman did not comment on whether the firm would offer an index of companies with relatively low ESG scores.

While ESG is likely to remain a hot topic throughout 2022, the opportunity to hear multiple perspectives at Inside ETFs made the panel both enjoyable and educational.

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