While not as new of a concept as many investors believe, environmental, social, and governance investing — also known as ESG investing — continues to gain traction in the investment world. In fact, a Morningstar report showed that ESG funds captured $51.1 billion of net new money from investors in 2020, a new record and more than double than the year prior.
Conversations about ESG investing often frame the increased interest in and demand for sustainability-focused investment products as a way for investors to align their money with their personal values – that is only part of the story. In truth, ESG investing when practiced correctly is primarily about improving investment performance. It is about avoiding investment risks from mismanaged resource use to help protect investor wealth. It is also about identifying companies that are innovating to help grow investor wealth.
The same way that traditional investors look at financial ratios (e.g. P/E, EV/FCF, etc.) to understand a company’s financial position and forecast its ability to generate a positive return, sustainable investment professionals review material (i.e. relevant) ESG data and information to understand a company’s ability to generate long-term value for shareholders. In fact, studies have shown a positive correlation between climate efficiency and operational efficiency, and corporate resiliency. That is why the Etho Climate Leadership US Index and ETHO ETF developed by Etho Capital uses robust climate data and ESG research to identify sustainability leaders and avoid laggards.
How well a company manages and protects the natural resources used to make its products determines whether it can reliably and consistently provide those products to meet consumer demand. A company that invests in its employees and compensates them fairly enjoys higher retention rates and can benefit from the process and product innovations they create. Typically, companies that positively contribute to the communities in which they operate do not see challenges to their social license to operate from community protests and expensive lawsuits. All of these factors and others have an impact on a company’s growth and the long-term value it can create for its shareholders.
The emphasis on long-term shareholder value creation is also an important distinction.
I like to explain it to clients and others by saying, “Asset management is about creating and sustaining assets for the benefit of ourselves, our children, and the broader society into perpetuity. The environment and our society are assets. The focus of sustainable investing is about growing and preserving financial capital in tandem with rather than at the expense of our environment and our society. It is the true essence of asset management.”
Carefully consider the Fund’s investment objectives, risk factors, charges and expenses before investing. This and additional information can be found in the Fund’s statutory and summary prospectus, which may be obtained by calling 1-844-383-6477, or by visiting www.etfmg.com/ETHO. Read the prospectus carefully before investing.
Investing involves risk, including the possible loss of principal. Shares of any ETF are bought and sold at market price (not NAV), may trade at a discount or premium to NAV and are not individually redeemed from the Fund. Brokerage commissions will reduce returns. Narrowly focused investments typically exhibit higher volatility. The Fund’s return may not match or achieve a high degree of correlation with the return of the Etho Climate Leadership Index — US. To the extent the Fund utilizes a sampling approach, it may experience tracking error to a greater extent than if the Fund had sought to replicate the Index.
ETF Managers Group LLC serves as the investment adviser to the Fund.
The Fund is distributed by ETFMG Financial LLC. ETF Managers Group LLC and ETFMG Financial LLC are wholly owned subsidiaries of Exchange Traded Managers Group LLC (collectively, “ETFMG”). ETFMG is not affiliated with Etho Capital.