EconomyThese are the factors to consider when investing in...

These are the factors to consider when investing in sustainable instruments

It is now clear: sustainable investing is not a fad. At the end of 2020, assets that have best environmental, social and governance (ESG, or ESG) practices accumulated 1.6 trillion dollars in 196 different investment products, according to data from Morningstar, a US company of financial services.

More and more people are looking to invest in responsible companies, but for investors who have their account on an investment platform, some sustainable funds may not align with what they are looking for. The hallmark on ASG funds comes in many nuances and is sometimes not as “green” as you might think, particularly when it is an index-tracking fund such as ETFs. Here are some tips, from the experts, if you are looking for a more responsible investment:

Look closely

One of the main advice given by specialists is to look inside the indices that call themselves ASG. “In all ETFs you can have international access and you can know their objectives, the latest returns, which are the assets they replicate and their objectives”, says Alicia Galindo, professor at the School of Business and EGADE Business School of Tec de Monterrey .

One of the best known examples is the MSCI USA Extended ESG Focus Index. This index is replicated by one of the largest ETFs from asset manager BlackRock, iShares ESG Aware, with just over $ 17 billion of assets.

Inside, the index leaves out companies that sell firearms and tobacco, but 5.5% of its assets include oil industry issuers such as Exxon Mobil, Chevron and Exelon, according to data from BlackRock.

The methodology is clear for the investor: the MSCI index leans towards companies that have more favorable ESG characteristics within its initial index, MSCI USA, but does not exclude the rest of the assets with less sustainability. The idea behind this methodology is to pressure broadcasters to transition towards sustainable practices.

Align values

For the construction of sustainable indices and funds there are several methodologies, from indices that seek only to invest in ESG assets – which are the least among passive instruments (those that replicate indexes) – to those that give more weight to assets with best ESG practices, but without excluding “toxic” assets.

Faced with this diversity of methodologies, Jens Peers, investment director of Mirova, a subsidiary of the asset manager Natixis, highlights that it is important for each investor to define their ESG guidelines. That is, answer the question of whether the performance of the fund or stock or sustainability factors will be prioritized.

“If you think it is important to invest in line with your own values, you must understand that there are some strategies that call themselves ESG do not necessarily do that,” says Peers, from Mirova, who within his funds manages almost 1,000 million dollars in a sustainable global fund.

Once the investor has defined their values, they can choose between a passive or an active investment. In the case of ETFs, there are exchange-traded funds that are not so general on ESG issues and follow indices that focus on one of the three factors, for example there are indices that include only financial technology companies that are seen as more environmentally friendly. or broadcasters that have greater gender diversity on their boards of directors. Although the specialists and other studies consulted agreed that the world of ASG ETFs still lacks standardized and clear information for investors, the pressure on the issuers that make up these indices is increasing.

From the side of an investment fund, there are also managers specialized in ESG factors.

Check grades

Taking a look at rating agencies can give investors some clarity when choosing an ESG asset. Among the more than 100 rating agencies are Sustainalytics, S&P Global, Moody’s, MSCI, Refinitiv, among others.

The bad news is that they are not comparable as there is no standard to define the characteristics of an ESG asset.

Diversification

Galindo advises having a portfolio with more than 15 assets from different industries. The work is not easy, especially if it is limited to the local market. “Emerging countries are interested in growing, not stopping polluting, so it is not so easy to have this financial inclusion in the sustainable part,” says Galindo. However, in the global market there is a greater diversification of sustainable investment instruments and it is possible to access them thanks to the SIC (international quotation system) of the Mexican Stock Exchanges.

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