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Jordan Waldrep, TrueMark

Spot the difference when investing in ESG


Jordan Waldrep (pictured), Principal and CIO of TrueMark writes that last year, the Environmental, Social, and Governance investing space, or ESG, saw some of the fastest inflows of any area in the ETF universe. 

According to Morningstar, US ESG funds saw a record inflow for 2020 at over USD51 billion. That is more than double the total for 2019 and more than 10 times 2018. That kind of growth changes the market for ESG funds. 

An important thing to remember when discussing ESG investments is that there really is not a definition of what ESG is. There is no ‘ESG Bible’ out there that allows an investor to say this is ESG and that is not. As a result, there are many funds doing a lot of different things in the space, each defining ESG in their own way.  

Take the Environmental aspect as an example. One of the most pressing issues of our time is Global Climate Change. The way many investors look at company emissions of greenhouse gases is with a measure called ‘GHG intensity’ calculated as tons of carbon emissions per million dollars of revenue. It is a great apple to apple comparison across sectors and industries. According to MSCI, the S&P 500 has a weighted average intensity of 140 tons CO2/million of revenue. The largest ESG funds reduce that footprint by anywhere from 15-37 per cent. TrueShares ECOZ reduces that number to 37 tons/million or a 74 per cent reduction. That difference in carbon intensity shows just how important global warming is to different ESG funds and how much of a priority it is for them in their investing process. There is variety and no standard answer in the ESG space for carbon intensity. 

So when a segment of the investing market isn’t well defined and experiences the kind of growth ESG has experienced over the past few years, there is a flourishing of differences. A few years ago, there were no funds over USD1 billion in AUM in the ESG space. When this phase of growth started in ESG, investors had lots of reasons for wanting ESG. Some wanted their investments to reflect their beliefs, some were looking to leverage perceived growth in environmental space, and some viewed the issues raised by ESG as real risks facing companies. Whatever the investor’s reasoning, almost any ESG fund would do because there was no apparent differentiation in the space and with so few dollars involved there was little concern from the issuers. Investors had to be happy with any fund that was addressing the issue. 

Today the situation has changed. The past few years of growth has established ESG as a viable segment of the investing world that advisers need to understand. Today there are eight ETFs over USD1 billion with 18 more over USD100 million in AUM, each with its own take on how to invest in an ESG style. More investors care about ESG issues and expect their advisers to be able to explain why they chose one ESG fund over an alternative. More importantly, the growth of viable alternatives means investors will also expect their ESG investment to address the specific concerns they have in the ESG space. As we noted on climate change, there are significant differences the amount of carbon that different ESG funds have in their portfolios. Some investors will care about those differences. Other investors will not. That is what makes a market. As we move forward, more investors will be parsing through the available data to try and decide what makes the most sense for their goals. With so many viable options available, we have moved past one size fits all ESG investing. 

When an investor decides to invest in an ESG fund today or is reevaluating the positions in their portfolios, the differences between these funds must be assessed and evaluated in a completely different way than they were three years ago. Investors still have differing reasons for choosing to invest in an ESG based portfolio. Some investors will just want a general ESG flavor to the investment to make them feel better about the investment. Some will look for a significant carbon reduction in their portfolio. Others may be more focused on social issues being applied to the portfolio. There is an entire market of investors out there with different priorities, but the difference today is that the ESG market today is far more developed and robust to deliver those specific options. 

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