Sustainable exchange-traded funds(ETF) do not include companies with low environmental, social, and governance(ESG) scores. Instead, they proactively focus on those companies that have higher ESG scores. The ESG scores are quantitative and can be tracked by ETFs like indices. However, they are more complex than other investor preferences that ETFs track.
For instance, these ETFs would exclude companies that deal with drug substances, coal energy, and the manufacture of weapons, no matter how profitable they are. Instead, they would include companies that abide by the principles of the united nation’s global impact on human rights, human labor, business ethics, and the environment. In other words, these ETFs target companies with a greater positive impact on humanity.
Many investment firms have recently launched electric driving and vehicle technology ETF, which comprises global stocks focused on battery-making technology and eclectic autonomous vehicle manufacturing. Below are the benefits of investing in a sustainable ETF.
You Build a Portfolio That Is True to Your Values
Sustainable ETFs allow you to create a responsive portfolio; however difficult it is to have all companies invested in our portfolio profitable, every ethical investor desires to invest in those companies that share common values. They allow one to express their desire to protect others from the bad impacts of investments.
A report released by Deloitte clearly shows that the number of institutional and retail investors who applied ESG principles in their investment portfolios rose from 48 percent in 2017 to 75 percent in 2019. Therefore it’s no doubt that in the future, ESG principles will be the criteria for investing.
Sustainable ETFs Are Less Volatile
Every investor needs to control their exposure to risks when investing in any asset or fund; ESG funds tend to be more stable, making them an excellent option for investors. Although the profit returns generated by sustainable ETFs within a short time may not be much compared to some non-ESG funds, they tend to reduce the overall volatility of a portfolio. They also have additional risk filtration and are more stable returns even when other assets are falling in value.
They Are Good for Our Planet and Your Wallet
There has long been a myth that ethics and finances do not mix and that sustainable investing in the long term would lead to weak returns. However, that is true; studies have shown that sustainable ETFs have recorded equal or even greater returns over recent years than traditional funds.
More notably, during the covid-19 pandemic, sustainable ETFs outperformed traditional funds because such companies embraced ESG criteria in their investments which were critical for survival during the pandemic.
People believed that companies with higher ESG scores protected them from the negative effects of the pandemic and therefore had greater support for their growth. Between 2020 and 2021, these funds recorded an average growth of 27 percent.
Summary
Sustainable ETFs are investment funds that filter out companies with lower ESG scores. Over the recent years, they have been so beneficial to investors as they are less volatile, good for our planet, and also for investors’ wallets. They also enable investors to build a portfolio that is true to their values.
