Covid-19 has put a lot of things in perspective. Humans must work in tandem with nature. Science and technology have proved invaluable in monitoring the spread of the disease and in the development of tests and vaccines; science works but it must be harnessed towards ethical and sustainable goals.

How Can ETFS Play a Role in ESG Investing?

We cannot continue to exploit the natural world with no thought to the long-term environmental impact.

What Is ESG Investing?

The question for stock market investors is how to maximize their portfolio potential while remaining true to their values and global priorities. How to pursue sensible exposure to the most promising companies without selling out on core ideals.

ESG investing is when Environmental, Social, and Governance priorities are integral parts of the investment process.

It means that you don’t just review a company’s accounts, but consider whether it contributes to excessive carbon emissions, whether it pays its employees a living wage or whether its primary clients are dictatorial regimes that silence dissidents, for example.

While many believe that ESG investing can and does prove as potentially lucrative as other forms, as with all financial decisions, you need to do your homework.

Are you going to use ESG criteria negatively, i.e. to filter out possible stocks that don’t make the grade? Or positively, to seek out ESG causes that you want your investment to further?

It’s Hard to Pick the Winners

Let’s say you decide that you want to support companies pursuing carbon-reducing power options; that as part of your environmental awareness, you want your investment portfolio to include stocks for companies developing sources of alternative energy.

How will you choose the most compelling hydrogen stocks, the most attractive solar energy companies, or the most appealing companies commercializing wind power?

Companies leading the market towards sustainable energy solutions aren’t usually the established legacy giants.

These companies are blazing trails in emerging technologies that require government backing, scientific and industrial innovation, and changing consumer practices.

Even if you feel certain that the car of the future will be electric, it’s hard to know which specific electric car company will succeed.

Where Might ETFS Fit In?

And this is where ETFs could come in handy. Exchange-Traded Funds (ETFs) are traded like stocks on the stock market, but their value is determined by the bundle of stocks that they represent.

This spreads the investor’s exposure and means that if a particular stock performs badly, its effect on your investment (the value of the ETF) will be less than if you had invested in the stock alone.

So to continue the above example, if you believe that hydrogen fuel cells are the future of green power generation, storage, and transfer and you want exposure to hydrogen energy companies, you might invest in one or a few hydro businesses.

Or you might go for a hydrogen ETF that gives exposure to a bundle of stocks of companies that are involved in the hydrogen space.

HDRO for example, while not explicitly designed to pursue an ESG investment strategy, does offer exposure to companies that generate at least 50% of their revenue from hydrogen and/or fuel cell projects.

You would need to check the methodology, cost, and terms of the ETF, but an ETF likely offers simplified access to a more diversified portfolio. In fact, you might even consider an international ETF for even more diversification.

Over the long term, and depending on the way the ETF is constructed, we would expect it to reflect the overall movement in the sector, while individual stocks may boom or bust.

Of course, what I have said here is applicable to all ETFs and not just those related to ESG thematic sector investing. But one of the effects of the Covid pandemic has been to clarify just how interconnected we are as a species and to nature.

Conclusion

Individual retail investors are increasingly looking to establish a balanced portfolio that reflects both their financial goals and their new awareness of the need for a sustainable, ethical world.

An ETF focused on their particular ESG sector might be worth a look.

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