ETF Expert Corner

ETF.com’s Dave Nadig on ESG Investing, New ETF Screening Tools

June 20th, 2017 by ETF Store Staff

Dave Nadig, CEO of ETF.com, discusses the growing interest in ESG investing and new MSCI ESG data available to ETF investors.

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Transcript

You can listen to our interview with Dave Nadig by using the above media player or enjoy a full transcription of the interview below.

Nate Geraci: The focus of our show today is on socially responsible investing, and I'm now pleased to welcome to the program Dave Nadig, CEO of ETF.com. Of course, ETF.com is one of the world's leading authorities on ETFs and just last week, they rolled out a new feature where investors can now access MSCI's ESG ratings data. So you can now peer into any ETF and see how it stacks up from a socially responsible investing standpoint. Dave, as always, great to have you on the program.

Dave Nadig: Thanks for having me back, it's always good to be here.

Nate Geraci: Dave, as you may recall, you joined us on the program right at the beginning of the year and we talked about some of ETF.com's 2017 ETF predictions, one of which was that this will be the year ESG explodes. And you said at the time the question was whether ESG explodes from an asset standpoint or a new launches perspective. Obviously, we're now about 6 months into the year - I'm curious, how does this prediction look so far and is there anything that’s surprised you, whether positively or negatively?

Dave Nadig: Well, we haven't seen assets explode, that might be a bit of an exaggeration. We do have a dozen funds or so now that are hovering around a billion dollars, which is certainly enough money to start taking it seriously. We've definitely seen a lot of product launches though, we've had whole new players come in. Nuveen came in with a seven product suite of ESG funds covering pretty much the full spectrum - small cap, emerging markets, everything thing in the middle. We've seen Oppenheimer come out with their ESG revenue ETF. We've seen a variety of smaller entrants in the space, and we've seen some of the biggest players wade in as well, whether it's things like VanEck’s green bond ETF. We've had, over the past 12 months, maybe 20 or so product launches, and most of them are doing quite well.

Nate Geraci: Dave, as you look at the growing interest overall in ESG, what are some of the key drivers here? Why is this becoming a bigger focus, both from a fund company standpoint, but also from investor demand?

Dave Nadig: Well, we're in the midst of this $30 trillion hand down of wealth going on in this country, from the baby-boom generation to their children. I think sometimes it's mischaracterized as sort of a Millennial boom, but it's not a bunch of 22 year-olds in their basement collecting million dollar checks. This is the 40-year old woman who starts going to the financial advisor meeting with her 70-year old parents, for instance. Now, they're starting to talk about estate planning and handing down the accumulated wealth of a family to a new generation. Over the next 20 years or so, there's about $30 trillion in investable assets that's going to roll down through that process. That generation - the people who are now in their 40s - express in surveys and with their dollars that they want their money to not just earn something, they want their money to do something. This generational shift I think is really behind this. Because it's a generational shift, it's not like it's going to be $30 trillion on one day. This is going to be an investment for the long term for these issuers. So they want to get out early, they want to develop track record, they want to be there for when those conversations start happening.

Nate Geraci: Dave, when it comes to ESG investing, obviously some investors simply want to do the right thing with their money, right? They want to invest in companies they believe are pursuing the right values ethically. But I think other investors believe companies with higher ESG ratings might produce higher returns. Conor and I actually mentioned a study earlier from CNBC which I would say was largely inconclusive as it relates to performance. But I'm curious, have you seen any data out there regarding performance on companies rating high in ESG factors and should performance be a reason to invest in ESG focused ETFs?

Dave Nadig: Yeah, there's a lot of research going on right now about whether ESG factors are factors in the sense that small cap or momentum are factors, and therefore can you build some sort of black box smart beta portfolio that includes those factors and magically gets you risk adjusted outperformance. I don't think there's a free lunch anywhere in the factor and smart beta investing space. The research that I've seen, that I believe most, suggests that they're really different kinds of ESG factors. ESG is a big umbrella. We're talking about everything from people who are investing based on their religious values, to clean energy, and that's a very broad swath of things to put under one umbrella. There is evidence, and there's product out there, that suggests when you focus on the governance issues - whether that's diversity on boards, whether that's labor policies, whether that's how they deal with activists - when you focus on those governance issues, there is evidence that firms that rate highly on good governance practices do outperform. We have a great example in the market right now, EQLT, which is the Workplace Equality Portfolio - that's really a global equity portfolio that focuses on representation of, and policies around, LGBT workers in the workplace and that fund has managed to beat ACWI pretty handily for the last year. It hasn't been out for all that long, but that fund is eking out that performance. It's up 3% something over the S&P last year. We've seen the same thing with the Gender Diversity ETF. So there is output to be had there, you just have to be careful which one your picking.

Nate Geraci: Our guest today is Dave Nadig, CEO of ETF.com. Dave, ETF.com recently rolled out a new feature where investors can now easily access MSCI's ESG ratings data for a number of ETFs. So, for our listeners, if you go to the fund page for an ETF by simply typing etf.com slash whatever the ticker symbol is for a particular ETF - so, etf.com/IVV for the iShares S&P 500 ETF - from that fund page, you can now view a variety of ESG metrics. Dave, tell us more about this data. What will investors now find?

Dave Nadig: Yeah, so we partnered with MSCI, who calculates some I think 400 statistics around every company that they cover, which is thousands and thousands of companies around the world. They then roll those up into fund ratings, and they really broadly come into a couple of different categories and you can find this on the Fit section, which is where we do portfolio analysis for a fund. The first thing they look at is sin stocks - companies that are invested in tobacco and alcohol and making landmines and all these things that people are generally trying to avoid when they come in, that's what they call their screening exposure. How exposed is this portfolio to these sin stocks, and that just gives you a nice simple percentage, right? So the S&P 500 is about 12% in sin stocks - you can now see that and you can compare funds. We think that's useful for investors. The other important flip side of that is investing in things that are positive, right? Renewable energy, clean water, sustainable investment practices, sustainable farming practices. That's what they call their impact solution score and then you can get another percentage, and say what percentage of the revenue in the fund is being generated from these beneficial activities, in the case of S&P 500 for example that's 6%. So now you can compare a bunch of funds on an even playing field. And that's really the idea here. Not so much to just pick out the one fund that maybe, you know, most clean for clean energy, but to really compare your everyday funds against each other to know what you're buying.

Nate Geraci: Now, is this data provided for bond ETFs as well? Or is it just stock ETFs?

Dave Nadig: It is. MSCI is covering about 1300 funds right now out of the universe of about 2000, which is most of the stock and bond universe. It's obviously a little bit trickier on the bond side. We do now have, actually, a VanEck clean bond ETF out there, or a green bond ETF out there. That tends to be mostly by looking at the corporate issue, or the way you would look at the company, and is most relevant in the corporate space. A little bit less interesting if you're buying a treasury fund.

Nate Geraci: Dave, in terms of what investors may do with this data - earlier in the show, Conor made an interesting point. He mentioned how obviously the increased transparency around investment costs has clearly impacted investor behavior, right? We've all seen the flows into low-cost funds. So, he made the point that perhaps increased transparency surrounding ESG data will also change investor behavior. I'm curious, what do you think about that?

Dave Nadig: I absolutely think so. I think one of the reasons we wanted to really partner with somebody to start servicing this data was precisely to have this conversation - so that people, whether they think of themselves as a socially responsible investor or not, when they're evaluating say two or three different funds for their large cap equity exposure, this becomes another data point that they can look at. I think a lot of investors make the false assumption that all funds tracking the same part of the market are basically the same, so just pick the cheapest one. You and I both know that's not true. There are real portfolio differences. Those impact performance. They also have different ESG implications, and I think this just helps it be part of the conversation.

Nate Geraci: Are there any other bells or whistles regarding ESG data that you envision providing to investors at ETF.com? What could be next here?

Dave Nadig: Well, the other thing that we have put in place already is, you know, if you go to our pages you see a big logo that says what the score of the fund is. We also now put up a badge if the fund is in the top 20% of its peer group on ESG scores, just to quickly highlight those things. I'd be reluctant to roll out too much of this data. Like I said, MSCI produces 400 pieces of data. We're not going to service all of that, I think that would be a little overwhelming for most investors. I think what you'll see us do over the next six months to a year is use the tools that we've put up there, these six key metrics, to start talking about how to incorporate an ESG component into your decision making. I think that's how most investors can and probably should approach this - not to just blindly say, "I only invest in ESG" and therefore end up in a portfolio that's nothing but solar stocks. That's not great investing. But to incorporate ESG into the decision making process. So we're going to help work with investors to show how to do that.

Nate Geraci: Dave, I thought was perfectly put. We will have to leave it there. As always, we greatly appreciate you joining us on the program, and keep up the tremendous work over at ETF.com. We're certainly big fans of the website, so thank you for that as well.

Dave Nadig: Big fans of yours as well, so thanks very much.

Nate Geraci: Thank you, Dave. That was Dave Nadig, CEO of ETF.com. And again, if you want to access the MSCI ESG data for an ETF, there are two very easy ways to do so. You can either type etf.com slash the ticker symbol of whatever ETF you want to evaluate, or you can view the ESG data using etf.com's ETF screener tool, which is actually a great way to just compare ESG factors across different ETFs.