When it comes to investing, it’s natural for investors to look for themes that support their personal outlook and related investment goals. Investors typically align their portfolios with a particular strategy or sector that they believe will do well over the long term. For many, this means they rarely know or understand the details of the holdings that make up their portfolios. In some cases, investors may want to gain or limit exposure to certain international markets, niche market segments, or even different types of securities, but never really understand the details of how their portfolio is constructed.

Unfortunately, until recently, many investors never stopped to consider what type of impact their portfolio holdings have on the environment, society, communities, or the overall well-being of stakeholders. In general, profit and profit are the primary investment objectives and little else is thought of.

However, given the rise environmental, social and governance (ESG) investing and the underlying concerns that many investors have about the associated dimensions, strategies and types of investment candidates that make it into a portfolio are changing. In this article, we will take a closer look at how to do it middle cap investors take ESG factors into account when identifying candidates for their portfolios.

Key things

  • ESG investing is becoming a dominant theme for mid-cap investors to consider as part of their overall investment strategies.
  • ESG scores and related metrics are becoming popular data points to be found on ETF and company profile pages across the financial media. These metrics will help mid-cap investors compare investment candidates through an ESG lens.
  • The top holdings of a wide variety of ETFs focused on themes such as clean energy offer investors an interesting array of investment candidates.
  • ETFs like the iShares ESG Screened S&P Mid-Cap ETF offer investors a new way to gain exposure to a basket of ESG-screened companies.

Ecological and sustainable investing

One factor that is a top priority for ESG investors is the overall impact that investments have on the environment. The overarching goal of many ESG-based strategies is to reduce the global carbon footprint in an effort to address the problem climate crisis.

According to Larry Fink, founder, chairman and CEO of BlackRock, Inc. (BLK), in his 2022 letter to CEOs: “The next 1,000 unicorns will not be search engines or social media companies, they will be sustainable, scalable innovators – startups that will help the world decarbonize and make the energy transition affordable for all consumers. Fink goes on to say that it won’t just be small companies that will pave the way forward, but that many established companies have an advantage in capital, market knowledge and technical expertise.

In the spirit of this sentiment, BlackRock’s CEO would probably agree that mid-cap companies, or those that currently have Market capitalization between $2 billion and $10 billion, they are also uniquely positioned to make a significant difference in the transition to net zero carbon emissions.

Larry Fink is the CEO of BlackRock, which he and seven partners founded in 1988. Fink has been recognized for his leadership Luck and other publications. Barron’s has named him one of the world’s best CEOs for 15 consecutive years.

From the macro perspective of companies that prioritize production and distribution clean energy they may benefit from government and corporate initiatives as well as increased consumer demand in the foreseeable future. Each of the aforementioned parties calls for energy to come from sustainable sources such as wind, solar and hydropower.

Investors interested in gaining exposure to cleantech companies can use standard stock screeners and then do their own research to narrow down the list of possible candidates. Or more simply, they can look at the top holdings of the popular ones exchange traded funds (ETFs)as:

  • VanEck Environmental Services ETF (EVX)
  • iShares Global Clean Energy ETF (ICLN)
  • Global X Lithium & Battery Tech ETF (POUR)
  • Invesco Solar ETF (TAN)
  • Invesco WilderHill Clean Energy ETF (PBW)
  • ALPS Clean Energy ETF (ACES)
  • Invesco Global Clean Energy ETF (PBD)
  • VanEck Low Carbon Energy ETF (SMOG)
  • First Trust Global Wind Energy ETF (FAN)
  • SPDR Kensho Clean Power ETF (CNRG)

Some “clean” ETFs contain securities of oil and auto companies because these companies devote some of their research to alternative energy. Investors should do their research to determine if an ETF matches their values ​​and investment goals.

ESG scoring

Those new to ESG investing will be interested to know that several firms have implemented standardized scoring methodologies. ESG scores can serve as a basis for comparing companies and funds across many different metrics, such as a fund’s exposure to companies with high carbon emissions. In many cases, all metrics are combined together to produce one overall ESG score, which can be found for a significant portion of publicly traded funds and securities.

For example, MSCI ESG the rating is designed to measure the company’s resilience to long-term material environmental, social and governance risks. The rules-based methodology identifies leaders and laggards on a scale from AAA to CCC. MSCI also has an overall ESG quality score between 0 and 10 for easy comparison.

In addition to MSCI ESG Ratings, other common ESG scoring metrics come from S&P Global ESG Scores or Refinitiv Lipper, all of which are becoming quite common on the detail pages of many publicly traded ETFs.

iShares ESG Screened S&P Mid-Cap ETF

So far, this article has focused on the environmental and sustainability factors of ESG investing, as these are currently the top priority for most investors. However, dimensions such as exposure to controversial business areas and other governance-related matters are also very important. Although filtering based on specific types of business exposure and governance issues is more complex than filtering based on broad industry exposure such as wind or solar, it is not impossible for those interested.

Conversely, those without the time, experience, or interest to perform ESG-based screenings may be interested in ETFs such as the iShares ESG Screened S&P Mid-Cap ETF (XJH), which uses screening techniques to reduce a company’s exposure to controversy and controversial business activities. In the case of XJH, the fund’s managers are looking to eliminate exposure to controversial weapons, small arms, tobacco, oil sands and shale energy, thermal coal and fossil fuel stocks. The fund has an MSCI ESG Fund Rating of AA and an overall ESG Quality Score of 7.15 out of 10.

Bottom Line

The future of ESG investing is bright, especially when it comes to mid-cap companies which are in line with government and consumer demand for energy from sustainable sources. Investors are more interested than ever in ESG-related topics such as low-carbon strategies, reducing exposure to controversial business areas, product quality, worker safety, labor standards, voting rights, executive versus employee pay, and long-term sustainability.

ESG scoring metrics are starting to appear on many ETF profile pages as well as company offering pages in the financial media. As ESG continues to rise to prominence, it’s only natural that the scoring method will continue to play an important role in investment strategies and that we’ll start to see more ETFs like the iShares ESG Screened S&P Mid-Cap ETF.

What is ESG investing?

ESG stands for environmental, social and governance. Socially conscious investors use different dimensions across these three areas to filter potential investment candidates.

Is buying a “pure” ETF considered an ESG investment?

Certain holdings of “pure” ETFs may not be consistent with an ESG investor’s goals and values. For example, sometimes a holding company, such as a large-cap oil and gas company, will be added to a “pure” ETF because of its investments or intentions in alternative energy. It’s always a good idea to do your own research to make sure the investments align with your values ​​and investment goals.

What is an ESG rating?

The ESG rating is a comprehensive measure of a company’s or investment fund’s long-term commitment to socially responsible investments and dimensions across environmental, social and corporate governance. ESG scoring metrics are now available from a variety of companies. One of the most popular is the MSCI ESG rating.

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