For investors these days, it’s not just about making a decent return; it’s about making life more decent as well. Today, more and more investors are looking to match their investments with their morals, principles, religion and beliefs than ever before. Socially responsible investing (SRI) has gone from a fringe idea to a mainstream framework for finding ‘profits with a purpose’.
Founded using basic tenets from the Quaker community, SRI has evolved into a complex animal full of various strategies and indexes. Today’s socially responsible funds tap into a variety of environmental, social and governance (ESG) metrics designed to help comb the investing world for the best opportunities to match investors’ beliefs with their portfolios.
It’s no longer just about eliminating sin industries like gambling or firearms from broad indexes.
And with so many shades of gray in the world of ESG, exchange-traded funds (ETFs) have become a major place for investors to find their SRI fix.
See here to know how SRI can generate better returns.
Assets in ESG Have Surged
If you have any reservations about whether investors have fully embraced the idea of integrating ESG and SRI into their portfolios, just look at asset growth. According to ESG trade group US SIF Foundation, more than $8.1 trillion was invested in ESG portfolios at the end of 2016. To put that number into context, there was $40.3 trillion in total assets under professional management in the United States in 2016.
The intensity of growth in ESG/SRI portfolios can be seen in the asset growth of investment funds. These include mutual funds, variable annuities, ETFs, closed-end funds and other alternatives. Last year, the total amount of ESG assets in investment funds clocked in at $2.6 trillion. This was basically double the number of assets recorded in 2012 and more than 10 times the paltry $202 billion held in 2007.
And while ESG-focused mutual funds continue to dominate regarding assets, they are losing out to ETFs for future fund flows. The reason is simple. Aside from their lower costs, ETFs offer investors the ability to hone in on various ESG/SRI trends or belief structures. With more than 30 socially responsible ETFs to choose from, you can select exactly what you want when it comes to ESG metrics and themes.
Speaking of those themes, several have already emerged as some of the biggest trends in the world of SRI.
For a full list of socially responsible ETFs, click here.
The Top Five SRI Trends for 2017
Climate Change and Renewable Energy
While you can debate whether or not humans are responsible, the earth’s climate is shifting and changing. That has a huge and profound effect on everything we do. From the food we grow to the increased severity of storms and the damage they cause, our planet’s climate is a big deal to our way of life. Figuring out ways to potentially slow or stop the damage is paramount. With that in mind, one of the biggest trends in ESG/SRI is the shift from fossil fuels and those that emit high amounts of carbon to lower carbon emitting alternatives and renewables, as well as improving energy efficient methods.
And as a potentially multi-decade play, there are several ETFs that investors can use. The biggest could be the iShares S&P Global Clean Energy Index (ICLN ). ICLN tracks a variety of solar, wind and other renewable energy firms from across the globe. The global focus is key as many top renewable names aren’t domiciled in the U.S. Another prime choice could be the SPDR S&P 500 Fossil Fuel Free ETF (SPYX ). SPYX takes a different approach and removes stocks that have high carbon output scores from the S&P 500. The idea is that over time, as the shift continues, these stocks will fall by the wayside and produce poor returns.
For a deeper analysis of individual ETF investments such as ICLN or SPYX, use our ETF Analyzer tool. You can select ETFs by category or type as well as add unique ticker symbols to compare performance, expenses and dividend yield among other metrics.
Driverless Cars and Electric Vehicles
An offshoot of the need for lower carbon emissions, the transportation sector is ripe for an ESG makeover. And the trend comes down to driverless cars as well as the adoption of hybrid and electric vehicles. While driverless cars are years away, hybrids are here today, and their number is growing. Back in 1999, there were only 17 hybrid vehicles sold in the U.S. In 2015, that number increased to nearly 500,000, according to the U.S. Department of Transportation.
The way to play the shift is the Global X Lithium ETF (LIT ). Lithium is a critical component of the batteries needed to make hybrids and electric cars work. LIT tracks a basket of lithium miners and producers from across the world. While not the greenest play itself, LIT is vital to making the green movement work.
One of the biggest governance issues facing ESG is the fair treatment in the workplace, especially in terms of compensation between the sexes. In the U.S., there is a major disparity between what men and women earn for the same position. According to a Pew Research Center analysis of hourly earnings of both full- and part-time U.S. workers, women earned just 83% of what men earned.
Improving that difference has become a rallying cry of the ESG world and had led to SPDR SSGA Gender Diversity Index ETF (SHE ) gathering more than $300 million in assets in a short amount of time. SHE tracks a basket of U.S. large capitalization companies that are ‘gender diverse,’ which means that there are plenty of women in senior leadership positions and roles. There are a lot of studies that suggest that firms with diverse leadership positions tend to outperform those with male-centric boards.
With the world creating more data – from smartphones, cloud computing and even our toasters – the threat of cybercrime is real. Cybercrime is estimated to cost the world more than $400 billion a year to fight and recover from. Corporations are starting to take the threat seriously from a governance point of view. Loss of consumer data is now a loss of trust and results in poor performance. While not an ‘official’ ESG ETF, the PureFunds ISE Cyber Security ETF (HACK ) focuses on cybersecurity and tracks a basket of software firms that are dedicated to protecting users from data breaches and hacks.
Healthier and Organic Foods
Finally, the push to eat healthier and reduce illness before it starts has become another significant trend in ESG/SRI. From food producers who focus on better products to pushing unhealthy producers to change their ways through governance actions, food has become a major battleground. The Janus Organics ETF (ORG ) focuses on companies that capitalize on our increasing desire for naturally-derived food and personal care items.
The Bottom Line
ESG and SRI have exploded in recent years as investors have embraced the idea of matching their values to their portfolios. And in that matching, ETFs have become a major winner as several mega-trends have emerged from SRI. The previous examples are just some of the trends and ways to play them.
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