ETF Edge

How companies interact with their communities is noted in ESG scoring, index manager says

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How protests can inform socially responsible investing as ESG index outperforms

Corporations are on watch.

Companies' responses to their communities in times of stress are noted in S&P's scoring system for its ESG index, its manager told CNBC's "ETF Edge" on Monday after nationwide protests were held over the weekend over the death of George Floyd while in police custody.

Mona Naqvi, head of ESG product strategy at S&P Dow Jones Indices, runs the S&P 500 ESG Index, a basket of S&P stocks that rank highly for their environmental, social and governance values. The index has long taken into consideration companies' community outreach and is modestly outperforming year to date, down 4% versus the S&P's 5% decline.

"We do take into account things like how companies are behaving with respect to their raw stakeholders," Naqvi said. "So, not just their employees and their shareholders, but how do they interact with their broader community, which is really important in terms of building good will in times of stress like this."

"It's also important through ESG to take into account things like diversity," she said. "How does a company actually hire? What are its hiring practices? Is it diverse throughout its broader business operations? And I think these are all the types of issues that these protests are demonstrating are very important to many people that ESG can help capture."

Big bank and Silicon Valley executives have spoken out about the killing of Floyd while in police custody and the subsequent protests that erupted across the country. The statements were a mix of calls for diversity and inclusion, expressions of empathy and noting the resources available to employees.

"I think what these protests are demonstrating is that people really do have very strong convictions about these types of issues. They really do care deeply about all of this," Naqvi said. "ESG investing is just another channel through which people can align their values with their actions by incorporating these types of considerations into their investments."

Tom Lydon, CEO of ETF Trends and ETF Database, said the nationwide movement could be a tangential catalyst for ESG investments.

"There's never a better time to improve corporate values," he said in the same "ETF Edge" interview.

"Racism has no place in America and the events of last week kind of give corporate America an opportunity to reaffirm [to] their clients, their employees, their shareholders where they stand on this," he said. "So I think we'll come out of this on the other end much better and with a greater commitment to … environmental, social and governance issues."

While ESG ETFs have seen inflows this year, Lydon added that ESG's assets under management are still a fraction of the nearly $4 trillion U.S. ETF market.

"Many financial advisors have had interest, but haven't made the commitment," Lydon said. "I think coming out of this, not only are self-directed investors going to be more committed, but advisors are going to be more committed because their clients are going to demand it."

Xtrackers' S&P 500 ESG Index ETF (SNPE) climbed less than half of 1% in Monday's trading session.

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