What environmentally conscious ETF investors need to know

Investing in sustainable funds is on the rise for eco-conscious investors.

According to Morningstar, there are now more than 550 ESG funds, which allocate according to environmental, social and governance issues.

“We’re seeing sustainable products grow right now,” John Hale, global head of sustainability at Morningstar, said in an interview Monday on CNBC’s “ETF Edge.”

Investors poured an annual record $69.2 billion into the ESG fund last year. Despite the continuing high level of demand for the funds, Hale said the preferences for what investors want to see from the ESG fund remain “unchanged.”

“They’re not inconsistent at all,” he said, “but back to property managers to say, ‘Here’s what we generally want, now you have to figure out the specifics of it.

ESG funds promote various causes and initiatives. Some aim to promote gender or racial equality, while others invest in green energy technology.

“Sustainability is complicated,” Hale said. “Since it is an investment product, it needs competitive returns.”

To ensure superior performance, ESG funds work to accommodate the best in every sector, including oil and tobacco companies. As a result, environmentally friendly companies may be excluded because competitors tend to score better on certain metrics.

Hale gave the example of Tesla, which was excluded from the S&P 500 ESG Index (SPXESUP).

“There are all kinds of ESG issues that come into play when evaluating a company,” he said. “And to evaluate potential ESG risks to that company and its stock performance.”

In SPXESUP’s case, Hale said it was Tesla’s overall risk compared to the other auto companies that it excluded.

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“But that same index is not really considering the impact,” Hale said. “I think we need to get to the point where we’re combining [impact and risk]And there’s a more comprehensive analysis.”

If a stock like Tesla will be included in a portfolio because of its impact, Hale said there is an argument to be made for engagement — for investors to come to the table and ask for the company’s plan to hit zero. , and change it business.

“It’s the same thing about oil companies,” Hale said. “ESG funds can make choices. They are not all fossil fuel free, they do not exclude all oil and gas companies.”

Most ESG funds will consist of oil companies. Occidental (OXY), for example, often appears because it scores highest on certain metrics.

“During this tremendous boom in ESG over the past five years, generally speaking they have outperformed traditional investments.” Hale said.

Sustainable funds outperformed their competitors last year, but by a lower margin than in previous years. More than half of ESGs landed in the top half of their Morningstar category, with equity funds leading the way.