Are Sustainable ETFs a Short-Cut for Socially Responsible Investors?

We’ve talked before here at Weathtender about the importance of socially responsible investing. There is, without doubt, a growing trend for investors (and consumers) to care about the impact they’re having on the world. Alongside this, there is an inevitable consequence. If we all care more about where our money goes, investing in ethical companies becomes not just an important moral choice, but potentially a financially wise one, too.

Why social responsibility matters

The ModusLink CSR Report of 2015 stated that 66% of global consumers were willing to pay more for sustainable brands. More recent research by Cone Communications, carried out in 2017, backed this up. Almost 90% of respondents claimed they would purchase a product from a company that supported an issue they cared about. And around 75% said they would refuse to buy from a company that supports a cause they disagree with.

Given consumer statistics like those, it’s unsurprising that social responsibility is becoming something (some) companies care about. That means, logically enough, that socially responsible investing is becoming something asset management professionals care about, including financial advisors who have earned the CSRIC designation to demonstrate their commitment to socially responsible investing. The financial services industry is responding, with products designed to make life easier for clients, and therefore attract more of them.

Is there an easy way to invest sustainably?

One trend that has been growing for well over a decade is the rise of sustainable ETFs. As most investors know, an ETF (or Exchange Traded Fund) is a basket of assets put together as a financial product which can be traded on exchanges. These funds tend to track an underlying index and may hold stock from hundreds of companies. This allows investors to buy and sell their stock in large bundles, which often group stock together under a common theme.

Increasingly, some of these specialist ETFs have a socially responsible theme, often a very specific one. These funds are known as sustainable ETFs, or sometimes ESG ETFs. The ESG stands for environmental, social and governance. Three areas where criteria are set that the companies must meet in order to have their stock included in the fund.

Investing in sustainable ETFs can simplify life for ethical investors. They have a basket of pre-screened assets presented to them, without having to research hundreds of companies. Equally importantly, they can get a quick overview of how the fund is performing (and many are performing extremely well) without having to track the performance of those individual companies.

But will I find an ETF that aligns with my personal values?

What is fascinating, for the socially responsible investor, is how specific ETFs are becoming. One problem with ethical investing has always been the natural variance in what we see as ethically acceptable. Some of us care about climate change and animal welfare. Others are more invested in workers’ rights or gender equality. Some of us are concerned about fossil fuel usage. And some of us simply want to avoid supporting certain industries, such as tobacco, alcohol, or gambling.

For those willing to invest in ETFs, tailoring your investments to your values is becoming easier. There are currently ETFs that avoid companies with high carbon footprints, those that avoid companies who produce tobacco products, and those that filter out companies with reserves of fossil fuels. There are ETFs that focus on gender equality, and, as of September 2019, the first-ever Vegan ETF.

Are sustainable ETFs right for me?

So are sustainable ETFs right for you? That will depend on a number of factors. ETFs aren’t for everyone, but they can be a practical solution for socially responsible investors. While there are always pros and cons to any investment, there is certainly cause to investigate, if ethical investing is important to you. As with any investment, you will need to do your research and consider consulting a financial advisor who is a specialist in ESG investing. You’ll also need to assess whether any fund you consider meets all your investment criteria. Morals matter, but so does ROI, and there are always multiple factors to consider.

For those of us who want to make an impact, while still keeping our investment decisions as simple as possible, sustainable ETFs are an option worth investigating.