- You can incorporate ESG into your portfolio using ETFs.
- You can use ESG ETFs to build a highly diversified core portfolio.
- You can lower your overall investment costs while you invest responsibly.
Interest in sustainable investing, also called responsible investment, has grown by leaps and bounds in recent years. A recent survey found that 75% of respondents across the globe are integrating ESG into their investment approach.¹
Environmental, social and governance (ESG) exchange traded funds (ETFs) make sustainable investing easy for investors. This article explores what ESG ETFs are, how they work and the potential benefits they offer.
Breaking down the three pillars of ESG
| Environmental |
Social |
Governance |
| Climate change, natural resources, pollution and waste, environmental opportunities |
Human capital, product liability, stakeholder opposition, social opportunities |
Corporate governance, diversity, corporate behaviour, transparency |
1. ESG investing / responsible investment: These are umbrella terms used to describe various ways to incorporate ESG factors into the investment process. For investors, it’s about investing in progress, in the things that help companies perform better and create more value.
2. ETF investing: ETFs invest in a basket of stocks, bonds, or other assets. In many cases, ETFs track to a specific index. They offer a flexible, low-cost way to build a highly diversified investment portfolio.
Together, ESG ETFs offer a simple way to diversify across a wide range of investments while owning companies that have strong ESG characteristics.
1. ESG ETFs can make it easy to incorporate responsible investment in your portfolio. You can combine any number of different sustainable investment options. For instance, ESG ETFs can focus on companies with high ESG ratings. Some screen out certain ‘controversial’ industries, such as tobacco or weapons. And others may focus on certain themes, such as fossil-fuel free or gender diversity.
In addition, some ESG ETFs can also offer a one-ticket approach – combining a number of different ETFs into a single diversified portfolio. This type of ESG ETF portfolio, often called a ‘portfolio solution,’ offers a diversified portfolio in a single investment. Portfolio solutions may allow you to choose the target level of risk and asset allocation that fits you and your financial goals. The portfolio may be monitored and rebalanced by the portfolio managers so you don’t have to.
2. Investing sustainably can help deliver portfolio resilience. Investing sustainably has the potential to uncover hidden risks, capture emerging opportunities, and deliver enhanced performance. Climate risk and data security risk, as examples, could be overlooked in traditional financial analysis, but continue to grow as material risk factors and can have a direct financial impact on companies. By integrating ESG considerations into the investment process, investors are better able to assess a company’s long-term risk and return prospects and potentially enhance their portfolios’ risk-adjusted returns.
3. ESG ETFs can support broad diversification. ESG ETFs cover a wide range of asset classes, sectors and geographies. These funds also offer many ways to incorporate responsible investment principles in your portfolio. This means you can use ESG ETFs to add many different levels of diversification into your portfolio.
4. ESG ETFs can be a cost-effective way to invest. Many ESG ETFs are offered at a low cost. This makes them an affordable choice for long-term holdings at the centre of your portfolio.
In the end, ESG ETFs are about more than personal values. They’re about building a low-cost, diversified portfolio that includes quality companies with strong ESG scores.
Further insights and resources: