Trump environmental policies, Nike's Kaepernick campaign among catalysts driving millions into ESG funds

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Behind the ESG investing hype

ESG is red-hot.

Funds based on ESG -- or environmental, social and governance factors -- had record inflows in 2019, with new launches like the iShares ESG MSCI USA Leaders ETF (SUSL) drawing hundreds of millions in assets in their debuts. As of Thursday, SUSL had $1.89 billion in net assets.

But the inflows have some industry watchers wondering: Why the sudden rush to ESG? After all, the idea of socially responsible investing has been around for decades, and the term "ESG" was coined back in 2005, according to MSCI and Forbes.

For Josh Brown, CEO of Ritholtz Wealth Managment, there were two clear catalysts fueling the 2019 surge.

"A lot of this started as a counterreaction to Trump's environmental policies," Brown said Tuesday on CNBC's "ETF Edge." "I do think that that galvanized people and it forced people to look more closely at what they're investing in."

The Trump administration has targeted over 80 environmental rules as part of an unprecedented regulatory rollback. On Jan. 9, the administration moved to overhaul the National Environmental Policy Act to make it easier for federal bodies to greenlight infrastructure plans without considering climate change.

A host of renewable energy funds including the Invesco Solar ETF (TAN), Invesco's WilderHill Clean Energy ETF (PBW) and the SPDR S&P Kensho Clean Power ETF (CNRG) all gained over 60% in 2019.

"But the more proximate, specific thing that happened was what Nike did with Colin Kaepernick," Brown said, referring to the athletic wear company's ad campaign featuring the former San Francisco 49ers quarterback, who controversially chose to kneel rather than stand for the national anthem before a 2016 preseason NFL game to protest racial injustice.

The "Dream Crazy" campaign with Kaepernick won Nike its first Emmy in 17 years.

"I think that was a clarion call to large companies in America that said, 'You know what? You take a risk. You go out on a limb on social issues,'" Brown said. "Dick's [Sporting Goods] did it with banning certain types of guns from their stores."

"I think corporations last year — I don't want to say 'got woke,' 'cause it's cliched, but there were some concrete things that Nike did with the Kaepernick campaign that woke everyone up to say, 'You know what? There's actually money in taking a stand on certain issues,'" Brown said.

Dave Nadig, chief investment officer of ETF Trends, threw another big catalyst into the mix: institutional interest.

"We also saw institutional money really show up, and I think the advisors in retail tend to follow big moves by institutions," he said in the same "ETF Edge" interview. "Two of the biggest launches last year were huge ESG launches with international money coming in, hundreds of millions of dollars out of the gate in new funds. That tends to move the needle for people."

Now that interest is climbing, ESG should continue to gain traction, Matt Bartolini, head of SPDR Americas Research at State Street, said in the same "ETF Edge" interview, conducted at the Inside ETFs conference in Hollywood, Florida.

"I always say there's a lot of mind share in ESG, not a lot of market share," Bartolini said. "Ten years ago, the data on ESG was not as much as we have now. We continue to have more reporting standards by boards to report out, whether it's gender diversity across their leadership [or] their practices within environmental, social and governance issues."

But, at the end of the day, buying into ESG is "a very personal investing decision," particularly with a "democratized vehicle" like an ETF, so investors shouldn't be too surprised to find a high-quality oil stock or a natural gas name in their ESG ETF.

"There's always going to be some sort of disagreement there," he said. "You might have an oil servicing company in an ETF that is just excluding reserves, and that's exactly what it should be doing."

It's all about "nudging things in the right direction, not being perfect," Brown said.

"You will never be able to please 100% of the people," he said. "I think the important thing is to say, 'Look, this is where I draw my line in the sand.' So, for example, I'm conscious of the environment, but I can't have zero exposure to energy, and there's not enough market cap in solar. So, I'm going to have some natural gas companies that I think have a good record on taking care of their environmental responsibilities."

"You have to decide: what is a livable, workable portfolio? And do your best. And I think that's OK," Brown said.

Eventually, Brown could see the "S" in ESG "render[ing] itself redundant."

"Look at the Fortune 500," the CEO said. "They won't all have female CEOs, but you will definitively see across every industry more women on boards, more women in leadership positions, and all of a sudden, you'll wake up one day — and I hope it's soon — and you'll realize every S&P company now conforms to the S part of ESG, and so it no longer needs to be its own fund."

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