In the current market conditions, there is greater focus on what companies are doing to become more sustainable. This is good news for investors who want to support companies that are doing the right thing.
Armed with this knowledge, you may be interested in investing in exchange-traded funds (ETFs) that offer exposure to companies that are seen as leaders when it comes to being more environmentally and socially responsible.
A responsible ETF aims to invest in companies that demonstrate high standards of sustainability by meeting a set of predetermined criteria. There are many different types of responsible ETFs available, each with a slightly different focus.
To help you find the right one for your portfolio, here’s an overview of what features you should look for in a sustainable ETF:
Focus on a Specific Sustainability Metric
One factor that differentiates between different sustainable ETFs is the specific sustainability metric they focus on. When researching sustainable ETFs, you will generally find that they are classified according to the following sustainability metrics:
- Environmental Impact – Companies that have reduced their carbon emissions and managed their water usage are seen as environmentally responsible.
- Governance Practices – This looks at how companies treat their employees, customers, and suppliers.
- Working Conditions – This category focuses on how employees are treated at work, including the way they are rewarded and any benefits they are given. It also considers their health and safety conditions.
- Social Impact – This focuses on how companies impact their communities and the people who live in them. For example, you may find that a sustainable ETF focuses just on the environment, or it might take a broader approach, considering all four metrics.
Limit Exposure To Certain Sectors and Industries
One key question to ask when considering sustainable ETFs is whether the fund is focused on certain sectors or industries. This will help you understand what type of companies the fund will invest in, as different sectors and industries tend to be associated with certain sustainability metrics.
For example, a fund that focuses on governance practices will likely have a different set of stocks than a fund that focuses on environmental impact.
Transparency
With increased focus on sustainable investing, there are now more ETFs available that are transparent about the companies and industries they invest in. This means that you can easily see the sustainability metrics that the fund focuses on. Along with this, you should also see a list of the ETF’s top holdings, along with their sustainability scores. You can use this information to see whether or not the fund makes sense for your portfolio.
Choose Socially Responsible Companies Only
Sustainable ETFs that focus on a certain sustainability metric will often only select stocks from companies that excel at that metric. For example, a fund that focuses on social impact may only select stocks from companies that only revolve around positively impacting communities. This can be a good thing, as you can be confident that the fund is only investing in companies with high standards of sustainability.
In Conclusion
As investors increasingly focus on sustainability, we are seeing the rise of sustainable ETFs. These funds are designed to support companies that are doing the right thing for the environment and society. That said, just because you’re investing in a sustainable ETF doesn’t guarantee that this investment will perform well in the future.
