In theory, there shouldn’t be much debate about Tesla’s (NASDAQ:TSLA) standing as an environmental, social, and governance (ESG) stock. After all, the company is the largest electric vehicle maker.
However, debate about Tesla’s ESG credentials was stirred earlier this year when the shares were excluded from the S&P 500 ESG Index, meaning that investors in some exchange traded funds that follow that gauge are now without Tesla exposure. Chalk it up as one more example of investors needing to evaluate indexes and know what’s under the hood before allocating capital to a specific ETF.
Tesla’s exclusion from that index is also another example of index providers and fund issuers employing varying approaches to ESG. Investors looking for a broad, straightforward approach to this style of investing may want to consider the IQ Candriam ESG US Equity ETF (IQSU ).
IQSU tracks the IQ Candriam ESG US Equity Index, and that’s relevant because index provider Candriam, which is one of Europe’s top asset managers, is steeped in ESG and socially responsible investing (SRI) experience. On those fronts, Candriam puts its money where its mouth is.
“Almost one third of our AuM is invested in sustainable strategies. Strong, independent research is one of the cornerstones of our pertinent and innovative sustainable investment approach. Our voting policy encourages virtuous corporate behaviour. 10% of the management fees earned from our sustainable investment SICAV is donated to impact projects in education and social inclusion,” according to the firm.
Getting back to specific investment philosophy, the bulk of IQSU’s 346 holdings are credible ESG names, including Tesla, which is the fund’s fourth-largest holding at a weight of 2.8%.
“There’s no clear consensus on what actually constitutes ESG, and incorporating ESG criteria into an index methodology can yield unpredictable behavior. Investors in ESG index funds are thus forced to make trade-offs between ESG integration and broad diversification,” noted Morningstar analyst Lan Anh Tran.
As noted above, some index-based ESG strategies do force investors into trade-offs, including lack of exposure to a name such as Tesla. Others may feature surprisingly large exposure to sectors with ESG offense potential, such as energy, materials, and utilities.
Conversely, backed by the Candriam methodology, IQSU doesn’t force investors into such a corner. Rather, the Candriam index backstops IQSU with a deep bench of stocks, providing investors with depth and a sensible ESG approach. That combination could be a long-term winner.
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