Environmental, Social and Governance
Environmental, Social and Governance (ESG) Investing, interchangeably used with Socially Responsible or Impact Investing, refers to the incorporation of ESG factors into investment decision-making, thus incentivizing better practices from the companies.
As an example:
- Consideration of a company’s emissions, carbon footprint and resource use determines its environmental impact
- A company’s effectiveness towards a healthy and safe workplace, maintenance of diversity and equal opportunities and its capacity for integrity and data privacy, determines its social impact
- Its effectiveness towards equal and fair treatment of shareholders and robust management practices determines its good governance structure.
ESG Portfolios at Interactive Advisors
Interactive Advisors offers various ways to invest in ESG portfolios.
ESG Smart Beta Portfolios
Smart Beta describes a set of rules-based investment strategies. The goal is to achieve an alternative risk-return profile which is more attractive than a simple capitalization-weighted index such as the S&P 500. Interactive Advisors offers Smart Beta Portfolios managed by our Chief Investment Officer and Investment Management team. The ESG Smart Beta Portfolios are built using rules based algorithms to invest in companies with positive environmental, social and governance (ESG) factors, as well as attractive fundamental factors.
We currently offer 5 large cap Smart Beta ESG portfolios that target different fundamental factors. Learn more about each of our offerings below:
What powers the ESG factor?
We use ESG data provided by Thomson Reuters in our portfolio screening and construction process. Our ESG factor is powered by relative ESG performance across 10 themes:
| Factor | Theme | Measures |
|---|---|---|
| Environmental | Resource Use | Performance and capacity to reduce the use of materials, energy or water, and to find more eco-efficient solutions by improving supply chain management |
| Emissions | Commitment and effectiveness towards reducing environmental emissions in the production and operational processes | |
| Innovation | Capacity to reduce the environmental costs and burdens for its customers | |
| Social | Workforce | Effectiveness towards job satisfaction, a healthy and safe workplace, maintaining diversity and equal opportunities, and development opportunities for its workforce |
| Human rights | Effectiveness towards respecting the fundamental human rights conventions | |
| Community | Commitment towards being a good citizen, protecting public health and respecting business ethics | |
| Product responsibility | Capacity to produce quality goods and services integrating the customer’s health and safety, integrity and data privacy | |
| Governance | Management | Commitment and effectiveness towards following best practice corporate governance principles |
| Shareholders | Effectiveness towards equal treatment of shareholders and the use of anti-takeover devices | |
| CSR strategy | Practices to communicate that it integrates the economic (financial), social and environmental dimensions into its day-to-day decision-making processes |
Read more on Thompson Reuters Refinitiv’s ESG methodology here .
What powers the fundamental factor?
A factor-based approach to portfolio construction is grounded in academic research. Interactive Advisors has undertaken research and back-testing to decide on the fundamental factors and rules used to construct these portfolios. For example, in the Growth ESG Portfolio, stocks with attractive growth ratios receive higher allocations, and both trailing and forward earnings growth measures are considered when determining allocations.
ESG Asset Allocation Portfolios
Asset Allocation describes a set of diversified portfolios that are dialed up or down for risk, offer good diversification across different asset classes, and attain this diversification by investing in low-cost, liquid ETFs. We offer Asset Allocation portfolios with three levels of risk and variants for regular and retirement accounts. Asset Allocation is all about diversification. Read more about our Asset Allocation building methodology here.
Selecting ETFs
Specific Exchange Traded Funds (ETFs) are screened and chosen that in our view best represent the target asset class, factoring in both management fees and liquidity. Additionally, the factors we consider for finding suitable ESG ETFs are the fund’s:
-
Holdings:
- Appropriateness for the target asset class
- ESG methodology for selection
- Ability to track the target benchmark
Since we diversify within an asset class, sometimes we find no suitable ESG ETFs. In these cases we revert to what we think are the best-in-class ETFs.
Let us select for you
Answer a few quick questions and we will create a low-cost, diversified portfolio customized for your needs and risk tolerance.
How did we get here?
A change in expectations:
Responsible investing has been around for quite some time, but recently there has been a shift in expectations. Unlike exclusionary investing, which is mostly based on excluding investments in companies such as those involved in the sale or production of alcohol, tobacco or firearms, ESG investing is based on the assumption that ESG factors have financial relevance.
While the original belief was that you would give up a part of your financial returns in pursuit of your values based investing, responsible investors now recognize the relation between how companies interact with the environment and societies that they are part of and their investments in those companies. The ESG factors cover issues that were not traditionally part of financial analysis yet have financial relevance as well as increase the prospects of long-term stable returns. You no longer have to choose between beliefs and sound financial decisions.
The changes underlying the trend:
Today, ESG investing is estimated at over $20 trillion in AUM and continues to grow at a steady clip. The major barriers to ESG investing had been limited availability of necessary data as well as buy-in from companies and financial institutions. However, in recent years there has been a revolution built on a few landmark events:
- Global Reporting Initiative (GRI) to get companies to report standardized sustainability data. Today most large-cap and many small-cap corporations report ESG metrics
-
UN Principles of Responsible
Investing:
- 2005: The United Nations and a group of the world’s largest institutional investors developed the Principles for Responsible Investment to advance the integration of ESG into analysis and investment decision-making
- Today, the UN PRI has 1,600 members representing over $70 trillion assets under management, leading more and more companies to adopt ESG disclosures creating a virtuous cycle
- Data providers like Bloomberg, Refinitiv (formerly Reuters), Sustainalytics and MSCI among others started providing clean ESG data for most large cap companies worldwide
- More recently, the International Integrated Reporting Initiative (IIRC) and the US-based Sustainability Accounting Standard Board (SASB) have helped investors further identify the key metrics for each industry and sub-sector to make better informed decisions
- These portfolios mainly invest in stocks and ETFs and may not be suitable for all investors.
- Nothing on this page should be construed as a solicitation or offer or recommendation to buy or sell any security or as an attempt to provide any investment advice. Investment advice is only provided to investors who become clients pursuant to an investment management agreement. Covestor Ltd is an investment advisor registered with the Securities and Exchange Commission, doing business as Interactive Advisors (“Interactive Advisors”).
- Past performance is no guarantee of future results, and all investments, including those in this portfolio, involve the risk of loss, including loss of principal and a reduction in earnings.
- Detailed information on the risks, conflicts of interest, applicable brokerage commissions, fractional shares, and limitations on investments and divestments associated with these portfolios (along with Interactive Advisors’ full disclosures) is provided on the Forms and Agreements page. Additional information on the performance, composition and construction process for these portfolios may be found on each portfolio page.
- Registration does not imply a certain level of skill or training. Brokerage services are provided to Interactive Advisors clients by affiliate Interactive Brokers LLC, an SEC-registered broker-dealer and member NYSE, FINRA and SIPC.