Page 20 - Investment Advisor - Jan/Feb 2021

ESG HORIZONS

These and many other sustainable “We are talking about resilience,” wrote social, and governance (ESG) matters
investing initiatives are taking place Nathan Hunt of S&P Global. “Change that could influence a company’s long-
against a backdrop of shifting perspec- is upon us — environmental change, term performance.”
tives on sustainability issues, which was social change, technological change, and Fleming’s office suggested reversal of
a key topic in many investment outlook geo-political change. ESG scores, bench- what the Investor Advocate Office consid-
webinars and briefings this reporter marks, and data are a way of measuring ered “the most troubling recent actions”
attended in the past two months. a company’s or a portfolio’s ability to of the commission: the shareholder pro-
“It used to be about how much weather that change effectively.” posal rule, the proxy advisory firm rules,
investors were willing to give up to Through the third quarter, a rulemaking to “harmonize” various
achieve sustainability objectives,” said Morningstar found that nearly three- Securities Act registration exemptions,
Jean Boivin, head of the BlackRock quarters of sustainable equity funds and a rulemaking related to inverse and
Investment Institute. “Now it’s not placed in the top halves of their quar- leveraged exchange-traded funds.
about the tradeoff but about sustainabil- tiles and 45% placed in the top quartile. The launch of the first nontranspar-
ity as a driver of returns, which will play “Given where the world is headed, ent ETFs during 2020 represented “a
out over years.” companies that have ESG issues better significant milestone for the ETF indus-
William Davies, head of global equi- managed or embedded … will be attrac- try while triggering potential new inves-
ties at Columbia Threadneedle, said, tive growth prospects in the coming tor protection concerns,” the 96-page
“Whenever we look at a company we years,” Hale said. report states.
need to look at ESG factors because that He encourages advisors to be more As the report explains, unlike tradi-
will have an impact on the risk of a com- proactive about sustainable investing, tional ETFs, nontransparent ETFs are
pany and its potential rewards.” asking clients about their preferences, not required to disclose their portfolio
Taking ESG factors into account preparing for their responses and put- holdings on a daily basis. This fea-
“leads to better investment outcomes, “ ting together a solution that they think ture enables asset managers to utilize
said Jody Jonsson, portfolio manager at will fit client needs. the ETF structure for active portfolio
Capital Group. “Prepare for a general investment management strategies without expos-
That has been borne out by some solution; it doesn’t have to be custom- ing their proprietary strategies to the
investment returns this year. ized for everybody,” Hale said, point- marketplace. The feature also necessi-
ing to a wide range of solutions from tates, however, that a nontransparent
PERFORMANCE FACTS basic ESG-tilted portfolios all the way ETF find a satisfactory replacement
An analysis by S&P Global published in to focused impact funds, as well as or substitute for the transparency-
late December found that as the year model portfolios. based arbitrage mechanism that has
progressed the performance of the S&P Morningstar recently began formally been at the conceptual core of ETFs
500 ESG Index, which includes 300 of integrating ESG factors into its analysis for decades.
the S&P 500 companies, those with rela- of stocks, funds and asset managers, “Given the very recent launch of
tively higher ESG scores outperformed starting with analysis of more than 145 these products, it is too early for us to
the S&P 500 by close to 2%. funds and 40 asset managers. conclude whether the various arbitrage
mechanisms utilized by nontranspar-
ent ETFs are as safe and effective as
SEC’s Investor Advocate Decries the traditional, transparency-based ETF
arbitrage mechanism,” the report notes.
Deregulatory Agenda Under Clayton The Office of the Investor Advocate
was created by the Dodd-Frank Act.
he Securities and Exchange SEC’s Office of the Investor Advocate Fleming was the first person named to
TCommission’s deregulatory agenda also told lawmakers that the commission the post in 2014. Though he reports to
under former Chairman Jay Clayton, also failed to “prioritize repairs to the the SEC chair, he submits two reports a
characterized as efforts to “modern- antiquated infrastructure of the proxy year directly to Congress.
ize” or “streamline” rules, diminished voting system, bypassed opportunities to
investor protections, according to SEC make disclosures machine-readable, and Bernice Napach can be reached at bnapach@
Investor Advocate Rick Fleming. failed to establish a coherent framework alm.com. Washington Bureau Chief Melanie
In its year-end report to Congress, the for the disclosure of environmental, Waddell can be reached at [email protected].

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