How to Balance ESG and Market Representation
Pure ESG investments require trade-offs.
Shopping for environmental, social, and governance funds might feel a bit like walking down the supplements aisle at the grocery store. There is a vast array of products from multiple brands, each with a different tagline. It’s often difficult to gauge which is right for you, especially when the language around these products doesn’t lend itself to easy comparisons.
In an effort to sort out what’s what, we have previously shared a simple framework to help investors sort ESG strategies. This article will further animate the key factors that investors should consider when they peel back the label on ESG-intentional index funds. We will conduct a case study focusing on three ESG-intentional indexes from MSCI which underpin five different Morningstar Medalist funds. These indexes aim to balance ESG integration with the benefits of broad diversification and market capitalization weighting. Each has its own process, and each of these processes results in different levels of active risk relative to their parent index. Investors in the funds that track these benchmarks are faced with a trade-off between the degree of ESG integration they prefer, and how far from the broad market portfolio they’re willing to stray.
Lan Anh Tran does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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