ETF Edge

Investment in ESG 'should at least double' this year, researcher says

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    The reasoning behind why you might find Microsoft and Apple in your ESG ETF

    Looking for the next big thing?

    In 2020, that could very well be ESG, an investment thesis that buys into companies that score highly for certain Environmental, Social and Governance factors. That's according to Tom Lydon, CEO of researching platforms ETF Trends and ETF Database, who sees assets in ESG growing rapidly this year despite lingering market risks.

    Lydon told CNBC's "ETF Edge" on Monday that investment in ESG "should at least double" as investors learn more about the strategy.

    Research firm ETFGI said earlier this year that, globally, ESG ETFs had accrued roughly $52 billion in assets under management, a fraction of the $6 trillion overall ETF market.

    "We're talking with advisors who are coming to ETF Trends and ETF Database all the time and you're starting to see, just by the nature of them reading more ESG-related stories and looking at more ESG-related ETFs and digging down into their makeup, that there is definitely more interest there," Lydon said. "The fact that there's been a little bit of outperformance is also great."

    The S&P 500 ESG Index, which tracks an optimized basket of S&P stocks that have been scored on ESG metrics and redistributed based on their market caps, is down 3% year to date while the S&P itself is down 4%.

    Beyond that, its biggest holdings are some familiar faces. Microsoft, Amazon, Alphabet, Apple and Facebook are among the biggest positions in the index, which could be another factor attracting investors to ESG-based funds, Lydon said.

    "Those are the companies that not only are doing well in this coronavirus environment, but probably, coming out on the other end of this, are going to continue to do well," the CEO said. "And if those have high ESG scores, which they do, that does nothing but help improve the confidence of the average investor there. If they can not only invest in good companies from a profitability standpoint, but good companies from a value standpoint, it's the best of all worlds."

    At the end of the day, the S&P's objective with its ESG index is to mirror the benchmark closely while using other information to effectively reorganize the index according to ESG values, Mona Naqvi, head of ESG product strategy at S&P Dow Jones Indices, said in the same "ETF Edge" interview.

    "Make no mistake: ESG is about financially material information, even if it comes from non-financial sources," Naqvi said.

    "When you're looking at something like Alphabet ... and what it is that makes them better than some of their industry peers, you're looking at an industry-specific relative comparison," she said. "Do they perform better on those environmental, social and governance issues that are more relevant to the long-term success, financial success, of those businesses relative to their industry peers? And, really, that's what ESG is ultimately about: more informed investment decision-making."

    Ultimately, Naqvi expects ESG strategies to become a tool for investors seeking to align their morals with their wallets.

    "I think ESG is going to be the tool that is the roadmap that is going to allow investors and society more broadly to hold companies to account, to make sure that the issues we care about throughout society — be it social justice, be it inequality or diversity or whatever it may be — [are] actually reflected in the companies that we're investing in," she said. "ESG is ... the toolkit to allow us to do that and make sure that companies are held to account and we actually have some ability to influence them through our investments."