Scoring a point for ESG investment advocates, Sage Advisory Services president and CEO Bob Smith recently explained how an ESG-oriented strategy they employed outdid their normal strategy.
“We went and looked at our returns over the course of this year, and were able to demonstrate through the selection of ESG-oriented ETFs over non-ESG-oriented ETFs that we were able to outperform our normal strategy, our all-cap equity strategy, both on a gross and a risk adjusted basis,” he said in an interview with Financial Advisor IQ
. “Not hitting that out of the park, but very much slightly ahead and for very similar cost, if not slightly less cost in terms of the internal costs associated with those ETFs.”
Asked whether ESG investment would go against a new fiduciary rule that compels US advisors to act in the best interests of their client – which are usually interpreted as financial – Smith said there’s no need to worry. “You don't have to give that up,” Smith said. “[I] n their recent regulatory changes, [the DOL has] allowed ESG-oriented investments to be permitted and brought into the defined contribution world as qualified assets and a qualified asset or investment management choice.”
Smith said that the key to success lies in thorough screening. In his firm’s case, they winnow through ESG-rated funds as graded by the globally renowned Morningstar. “We need to look at both growth and value as well as international and domestic… [and] we generally will look for those that have 25, 50, 100 million or more in size as a qualifier [for liquidity, good two-way markets, and reasonable cost in terms of bid-offer spreads].”
“[And] we generally look for ESG scores of around 50 or higher,” Smith added, referring to Morningstar’s rating system. While the ratings are quite new, they are informed by global ESG assessment firm Sustainalytics. “They have 120 analysts all over the world that do nothing but provide assessments from an environmental, social, and government standpoint… so that's really the power behind it.”
Smith also noted that there are gaps in the universe of ESG-oriented ETFs. The small-cap and mid-cap spaces could do with a few more choices, he said, adding that Morningstar’s rating system applies only when a minimum peer group size of 10 funds is reached.
He also pointed out that “[t] here are no ESG-driven fixed-income ETFs… we would like to see more done on the fixed-income area in terms of utilizing an ESG periscope [to find companies to include in a fund].”
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