Growth stock weakness is hampering many environmental, social, and governance (ESG) strategies, including exchange traded funds, but in a positive sign for this investing style, some professional market participants remain constructive on the long-term prospects.
That could be a positive for long-term adoption of ETFs such as the SPDR S&P ESG ETF (EFIV ). Home to nearly $432 million in assets under management, EFIV follows the S&P 500 ESG Index, which is the ESG offshoot of the traditional S&P 500.
“Most of the demand has been from institutional investors, but there are signs that ESG momentum is gaining traction with retail investors, too. Sustainable fund net inflows accelerated in 2020–2021, and although the pace slowed in 1Q22, it did not slow by as much as that of conventional funds,” according to Fitch Ratings.
Recently, regulators are showing willingness to scrutinize ESG strategies and punish firms engaging in greenwashing and related offenses. While that sounds ominous, those regulatory moves could have positive long-term implications for funds such as EFIV because the SPDR ETF features a non-controversial, easy-to-convey approach to ESG investing.
“Regulators are increasingly acting to deter and penalise greenwashing. In May 2022, the SEC charged the fund-management arm of BNY for mis-statements and omissions about ESG considerations in making investment decisions, which led to a USD1.5 million penalty,” added Fitch.
As a result of regulators keeping a more watchful eye as ESG and sustainability funds proliferate, disclosure requirements are becoming a focal point. That could create added allure for passive products such as EFIV among asset allocators who are looking for ESG exposure in a no-nonsense fashion.
“Disclosure requirements for sustainable products are one of the main regulatory themes facing the industry. The EU implemented its Sustainable Finance Disclosure Regulation in 2021 to make funds more transparent and easier to assess in terms of sustainability. Regulators in other regions are taking similar initiatives,” noted Fitch.
EFIV is cost-effective, as highlighted by an annual fee of just 0.10%, or $10 on a $10,000 investment. The fund holds 307 stocks across the 11 GICS sectors, including an almost 30% allocation to technology stocks. Broadly speaking, EFIV’s favorable expense ratio and easy-to-understand methodology could set up the ETF for long-term success.
“Notwithstanding the risks of greenwashing, we expect sustainable product offerings to become increasingly important as a competitive necessity, particularly as sustainability definitions become more harmonized,” concluded Fitch.
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