"Numerous Sustainability Exchange-Traded Funds act as deceptive, ineffective 'green' solutions"
In the world of exchange-traded funds (ETFs), there's a growing interest in sustainable and responsible investing (SRI). However, not all ETFs marketed as green are genuinely investing in sustainable companies, according to financial expert Mr. Enke.
Mr. Enke warns against relying solely on the SRI acronym to guarantee everything is sustainable. Many "green" ETFs, he says, don't contain particularly sustainable names; instead, poorly rated titles are excluded. This approach, while better than nothing, may not fully align with an investor's personal goals.
So, what sets SRI ETFs apart from normal ETFs? SRI ETFs apply rigorous Environmental, Social, and Governance (ESG) standards that go beyond conventional financial metrics. They use exclusionary screening to eliminate companies involved in sectors or activities deemed harmful or unethical, such as fossil fuels, tobacco, armaments, gambling, or alcohol.
Moreover, SRI ETFs employ the "best-in-class" approach, selecting only companies that demonstrate superior ESG performance within their industry. They may also focus on thematic or sectoral investments, such as renewable energy firms, and perform impact analysis to measure a company's positive contribution to sustainability goals.
In contrast, normal ETFs generally focus on market-cap or sector representation without explicitly applying ESG or ethical exclusions. As a result, they may include companies with poor sustainability profiles.
Mr. Enke advises against investing in ETFs that describe themselves as "synthetically replicated or swap-based." These products calculate the value without actually buying the stocks that are included in the underlying index, potentially resulting in a normal stock portfolio without any ESG selection.
For those who want to ensure their money has a positive impact, swap-based ETFs are not suitable. Instead, Mr. Enke recommends SRI ETFs, which usually align more closely with an investor's personal goals. Despite having a smaller number of companies (only 132 remain after a multi-stage process, compared to 457 in a normal ETF), the iShares MSCI Europe ESG Screened ETF, for instance, still includes controversial names like Nestlé, Total, and Rio Tinto.
Investors seeking to support small green start-ups should look for other paths, as these special investment options are not available at ETF prices. Mr. Enke suggests that many "green" exchange-traded index funds are more greenwashing placebos than genuine investments in sustainable companies.
In conclusion, when it comes to sustainable and responsible investing, it's crucial to choose ETFs that apply strict ESG criteria and genuinely support sustainable business models. Good advice in sustainability topics costs money, but it's an investment that can lead to a more sustainable future.
