Environmental, social, and governance (ESG) investing has been a worldwide phenomenon, a trend captured by the FlexShares STOXX Global ESG Impact Index Fund (ESGG ).
The fund literally puts the whole world in investors’ hands when it comes to getting global ESG exposure. Per the fund description, ESGG seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the STOXX® Global ESG Select KPIs Index.
The index is designed to reflect the performance of a selection of companies that, in aggregate, possess greater exposure to ESG characteristics relative to the STOXX® Global 1800 Index, a float-adjusted market-capitalization weighted index of companies incorporated in the U.S. or in developed international markets. The fund uses the index is its starting point and then sifts through companies by weeding them out based on the following criteria:
- Companies that do not adhere to the U.N. Global Compact principles
- Companies involved in controversial weapons
- Coal miners
“Next, the index employs bottom-up analysis of publicly available data to evaluate more than 150 ESG-related KPIs with broad representation among the three distinct categories of criteria—environmental, social and governance,” a FlexShares Fund Focus explained. “STOXX pays particular attention to the KPIs its research has shown to have been most influential in determining risk and return. Based on this analysis, each stock receives an aggregate ESG score, and the bottom 50% of companies are excluded from the index.”
“The custom index’s holdings from among the remaining 50% are tilted in favor of constituents with higher aggregate scores in an effort to optimize risk-adjusted return,” the Fund Focus added. “Finally, constraints are applied in the portfolio construction process to maintain sector and style neutrality compared to the index. In addition, the final portfolio targets holdings of no more than 5% in any single company.”
Exposure to Global ESG Opportunities
While the primary core of the ETF’s holdings are in the United States, ESGG also gives investors exposure to other parts of the globe. This includes countries like Japan, the United Kingdom, and France to name a few, giving investors diversification in their ESG portfolios.
“The FlexShares STOXX Global ESG Select Index Fund is designed to use a bottom-up approach to portfolio selection to help improve sector diversity and manage potential tracking error,” the article continued. “By relying on a methodology that applies ESG scoring early in the selection process, the Fund integrates ESG principles with more traditional portfolio analysis tools to maintain a diversified core equity investment strategy while tilting toward ESG criteria.”
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