ETF Edge

They may be attracting big money, but these ETFs may not be as eco-friendly as you think

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Buckingham Strategic's Swedroe on how to standardize ESG definitions

A popular group of stocks may be misleading investors.

According to S&P Global's Mona Naqvi, Environmental, Social and Governance (ESG) ETFs lack clarity, so investors don't always know where their money is going.

"A lot of different folks have different opinions and interpretations," the firm's global head of ESG capital markets strategy told CNBC's "ETF Edge" on Monday. "We need more clarity and transparency into precisely what a fund or ETF is claiming to do."

ESG funds, which include stocks from green energy to waste management, are attracting big money. Morningstar reports net new assets into ESG funds soared to $51.1 billion in 2020.

To create a more generalized definition for ESGs, many organizations are trying to reinforce more disclosure from companies, but even this may not be enough, Naqvi said.

"Even with consistent disclosures, we need to remember that this is an opinion about the relative importance of different types of sustainability issues from a risk perspective," she said. "It's ultimately an opinion on the overall performance."

Naqvi notes many standardized definitions may be dated due to unprecedented macroeconomic shifts in the global economy.

"A lot of our financial tools and data that we've been using in the past century may just need to be modernized and brought up to date," she said. "A lot of what we're trying to achieve is alternative insights to help inform a more sustainable or efficient allocation of capital."

The standardization of ESGs may never be resolved, warned Buckingham Strategic Wealth chief research officer Larry Swedroe in the same interview.

"The problem is everyone's opinion about what is good or more important can be very different," he said. "What it comes down to is your own unique perspective, what's important to you."

Swedroe is the co-author of a new book titled "Your Essential Guide to Sustainable Investing." The book explains differences between ESG, Socially Responsible Investing (SRI) and impact investing.

"Having consistent standards is useful, but we need to recognize that the data going into these products could be used and applied in different ways," Swedroe said.

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