Unintended Biases in ESG Index Funds
ESG index strategies can be effective tools for values-based investing, but they may introduce some additional bets that investors may not intend to make.
A version of this article was published in the May issue of Morningstar ETFInvestor. Download a complimentary copy of Morningstar ETFInvestor by visiting the website.
Environmental, social, and governance investment strategies can help many investors better align their money with their values. These strategies generally target firms that have a limited negative impact on the environment; promote diversity and have good relationships with key stakeholders, including employees; and strong corporate governance that promotes accountability. Many also exclude companies in certain lines of business such as tobacco, alcohol, and gambling. But there is a risk that this focus might introduce unintended sector or style bets, particularly among index funds. Differences in construction methodology can cause some strategies to have larger unintended biases than others.
Alex Bryan does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.