FlexShares STOXX U.S. ESG Impact Index Fund (ESG) tracks a proprietary STOXX index that rates companies based on environmental, social and governance factors that influence risk and return, such as workplace safety, executive compensation, and board diversity. The portfolio is weighted in favor of the best performers.
ESG (the strategy, not the ticker) is different from traditional socially-responsible investing, which typically tried to exclude bad actors and industries. Many advisers worried that this came at the expense of diversification and returns. So today’s strategies aim to be more inclusive. Instead of ignoring large swathes of the market, the goal is to maintain market-like diversification with a tilt toward the best corporate citizens. The top holdings aren’t that much different than plain-vanilla U.S. stock funds, with holdings like Microsoft, Apple and Amazon. The difference comes down to weighting. It’s worth nothing that there are plenty of skeptics when it comes to ESG investing, and critics say ESG whitewashes a portfolio rather than driving companies to truly change their behavior.
Issuers have rolled out dozens of ESG-style funds in recent years to appeal to younger investors who are concerned about the social impact of their investments, which means FlexShares has a lot of competition — especially when it comes to price. The management fees for FlexShares ESG are more than double that of rivals including the Vanguard ESG U.S. Stock ETF (ESGV) and the iShares ESG MSCI U.S.A. ETF (ESGU). Investors would do well to comparison shop.