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Here's why you might find stocks such as Microsoft in ESG-friendly funds

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ESG takes hold with ETF investors—here's what you need to know before you buy in

ESG is gaining steam.

Wall Street investors are becoming increasingly interested in the investing theme known as ESG, which stands for environmental, social and governance. The theme uses these categories to score companies based on their corporate responsibility profiles, and it's becoming pervasive in the world of ETFs.

But those buying funds such as the iShares ESG MSCI USA Leaders ETF (SUSL) or the iShares MSCI USA ESG Select ETF (SUSA) may be surprised at the stocks they find inside.

SUSL, for example, counts the stocks of Microsoft, Google parent Alphabet and Johnson & Johnson among its top holdings. Those three names comprise nearly 15% of its 324-stock portfolio.

Including popular, large-cap stocks in an ESG fund may not be as insidious as some may think, however, says Alfred Eskandar, co-founder, president and chief operating officer of Salt Financial.

"When you think about ESG companies like ... Microsoft, you've got best practices. You've got Class-A management and board structure and transparency," he said Monday on CNBC's "ETF Edge."

The "social" aspect also factors in how companies treat their employees, Eskandar said, and in many ways, Microsoft has met the criteria.

"That's a big factor of ESG, and the social awareness and being able to make your employees happy makes your clients happy, which makes for a better company," Eskandar said.

Armando Senra, BlackRock's head of U.S., Canada and Latin America iShares, said in the same "ETF Edge" interview that there's a process behind his firm's inclusion of these companies in its ESG-focused ETFs.

"We tend to have ESG, the core of the ESG portfolio, ... closely tracking the index, and we're just optimizing for ESG factors," Senra said.

In SUSL, iShares' large- and mid-cap ESG fund, "we have higher tracking against the index, but [also] higher ... sustainable scoring for the portfolio," he said.

In other words, just because Microsoft's market cap is colossal enough to secure it a top spot in a market-cap-weighted index, that doesn't excuse it from being scored rigorously based on ESG criteria.

To some degree, that may explain the wave of interest ESG ETFs are now seeing, Senra said.

"This started a lot stronger in Europe, but the speed is catching up here in the U.S. as well. SUSL ... [has] been the largest ETF offering in 15 years. We raised [$]850 million," he said Monday. "So, the money's coming in."

SUSL and SUSA both fell slightly in Friday's trading session.

Correction: This story has been updated to reflect that Senra said SUSL has been "the largest ETF offering in 15 years."

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