Navigating an Ocean of ESG Strategies

Here's a simple framework to make sense of what's available.

Daniel Sotiroff 09.09.2021
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Here's a closer look at how funds in these cohorts approach ESG investing and the perils the come with each.

Exclusionary

Exclusionary ESG strategies generally offer broad exposure to the market but aim to avoid stocks with undesirable characteristics. Most start with a broad market index, like the S&P 500 or Russell 1000 Index, and remove stocks closely tied to certain lines of business. These often include companies linked to fossil fuels, alcohol and tobacco products, weapons, and gambling, among others. This focus is less about how firms are operating than the lines of business they happen to be in. Companies involved in significant controversies, like the Volkswagen emissions scandal, may also be excluded from these funds.

These portfolios tend to look similar to their parent index. The sector and stock weightings of these funds may differ slightly from the market, but they still tend to closely represent the index that serves as their starting point. Exclusionary strategies typically have well-diversified portfolios and low amounts of active risk. Tracking error relative to the market usually lands around 1 percentage point or less.

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About Author

Daniel Sotiroff  Daniel Sotiroff is an Analyst, Passive Strategies Research, for Morningstar.

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