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ESG scope could change in 2021. What two market analysts see ahead

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It could be a pivotal year for environmental, social and governance-related investments.

Securities and Exchange Commission Chairman Gary Gensler turned his attention to ESG in a recent statement, saying he asked staff to research an array of climate and workplace-related metrics to understand which are most critical for investors.

The move could narrow the scope of the red-hot ESG trade, with Gensler’s staff looking into how certain exchange-traded funds market themselves as ESG and the data underpinning those claims.

Spotlighting the issue should benefit investors, Arne Noack, DWS Group’s head of systematic investment solutions for the Americas, told CNBC’s “ETF Edge” this week.

“There isn’t that much consensus in relation to what is ESG,” Noack said. “However, that heightened scrutiny and heightened awareness will lead to heightened and elevated understanding of the investors and that, in our view, is very much a good thing.”

DWS runs the Xtrackers S&P 500 ESG ETF (SNPE) and the Xtrackers MSCI USA ESG Leaders Equity ETF (USSG), two popular ESG funds that both hit record highs on Friday.

Unlike narrow thematic funds that screen for companies with the lowest carbon exposure or most effective governance frameworks, SNPE and USSG take a “roughly sector-neutral approach, but with significant elevation of the environmental, social and governance-related profile,” Noack said.

That’s why he’s not bothered by criticism that funds like his look strikingly similar to quality-focused ETFs that don’t take ESG into consideration.

“The whole idea behind those funds is to have an investment and risk-and-return profile that is extremely similar to the non-ESG benchmark of the respective segments,” he said.

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“The intent of those portfolios is to give investors something that they can use as, let’s say, an S&P 500 ETF replacement, but elevate the ESG profile and not have to change … the investment process, but can do that as a plug-and-play type of solution.”

After a successful proxy battle with oil and gas giant Exxon Mobil, Engine No. 1 CEO Jennifer Grancio sees a path to promoting ESG values without setting official guidelines.

“What we’re trying to do at Engine No. 1 is advance the ball a little bit and invest in these companies and help to transform them and drive them in the right direction,” she said.

Engine No. 1’s new Transform 500 ETF (VOTE) aims to use activist investing to help do just that for the market’s largest companies, Grancio said.

“If you’re owning those shares, we can then be very active and activist in helping those companies transform over time,” she said. “But … transforming businesses and industries to take impacts into account, it is a long game. It’s not something where you should be judging that on quarterly performance.”

VOTE is up 2% since its June 23 launch.

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