ESG Issues Becoming Important For ETF Investors

Investors need to take a long-term approach when they are considering including environmental, social and governance (ESG) guidelines in their ETF portfolios, said Matthew Bartolini, head of SPDR Americas Research at State Street Global Advisors.

For instance, “look at how the energy sector has changed over the years. In the long-term, clean power has a return potential, but an investor may not see immediate returns,” Bartolini said Friday during a discussion about including ESG and socially responsible investing (SRI) guidelines in ETF portfolios, which was sponsored by Charles Schwab.

More than half (52 percent) of ETF investors say it is important to invest in socially responsible funds because they want their investments to align with their beliefs, and 40 percent said they would be interested in using ESG guidelines for all of their ETF investments, according to the 2018 ETF SRI report used as the basis for part of the discussion.

“Young people and women are flocking to ETF and SRI strategies,” Kari Droller, vice president of third-party platforms for mutual funds and ETFs at Charles Schwab, said during the conference call. Advisors also are becoming more interested in ETFs, with 68 percent of ETF flows now coming from RIAs compared to half one year ago.

When ETF investments that used SRI guidelines were introduced, the investments were mostly made by institutional investors, but the landscape is slowly switching to RIAs and retail investors, Bartolini said.

However, 84 percent of people with ETF investments still believe they have to sacrifice returns in order to use ESG and SRI guidelines, according to the study, which included 1,500 people with ETF investments.

Another problem is that “finding nuanced ETFs that are created with different ESG goals in mind is still difficult,” Bartolini added.

The top concern for those who consider SRI important is the environment (45 percent), followed by global sustainability, which includes poverty and health issues (44 percent), and corporate governance (38 percent), according to the study.

Bartolini said advisors should try to determine their clients’ goals and how important immediate returns are to them before advising them on including SRI guidelines in their ETF investments.