Environmental, Social and Governance: KLD Social ETF

09/24/2018 5:00 am EST

Focus: FUNDS

Charles Carlson

Editor, DRIP Investor

One of the areas of the investment world that has been gaining in popularity in the last five years is “socially responsible” investing, explains Chuck Carlson, editor of DRIP Investor.

This form of investing gets typecast under a lot of different names and acronyms—“ESG” (Environmental, Social, Governance) investing,” “sustainable investing,” and “virtue investing” to name a few.

The idea is to focus investments in companies with good environmental practices, positive workplaces, and strong corporate governance (transparency, etc.). Such companies, the thinking goes, should produce better market returns over time because of their “virtuous” characteristics. The reality is that the value of virtue investing is not clear-cut.

Investment strategies that focus on ESG investing have not necessarily put up better return numbers than, say, the S&P 500. To be fair, plenty of non-ESG investment strategies have not beaten the market either, so it is probably an unfair or at least incomplete yardstick to measure the “effectiveness” of ESG investing versus a market benchmark.

Indeed, ESG investors may derive additional utility or value above and beyond portfolio returns simply because they believe they are “doing good” with their investments.

To be sure, a counter argument to ESG investing is the following—individuals would do better if they focused on maximizing returns from their investments and then directing those portfolio profits to worthy causes that align with their values.

ESG proponents argue that looking at a company’s governance or environmental records is no different than looking at a firm’s revenue and profit record—all of those factors can provide insight into a company’s investment appeal and should be considered.

One problem with implementing an ESG approach is information. That’s why it is useful to get help from is a great starting place to begin screening for companies with solid ESG records.

The MSCI KLD 400 Social Index is comprised of companies that MSCI and KLD believe have outstanding Environmental, Social, and Governance ratings. Launched in May 1990 as the Domini 400 Social Index, it is one of the first socially responsible investing indexes.

The MSCI KLD 400 Social ETF has done a good job of tracking the broad market returns over the last few years. Investors who would prefer to own a basket of ESG stocks rather than pick individual stocks should consider the iShares MSCI KLD 400 Social exchange-traded fund.

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