Brokerages Increasingly Embrace ESG Funds

by on Jan 17, 2018

The rapid growth of ETFs is shaking up the industry. With over a 67% increase in net issuance since 2016, growth is expected to continue beyond 2018. Schwab stands out for growing its ETF assets to over $400 billion, doubling in the past four years. As more funds are issued, investors can more easily create portfolios that meet a wider range of objectives and needs. This especially rings true for ESG (Environmental, Social, Governance) funds, which gained substantial traction over the past few years.

Growing interest is likely spurred by the increased availability of these funds, with women and millennials leading the charge. In the last three years, Morningstar listed 34 new ETFs with ESG strategies. Prior to 2014, Morningstar listed only five ESG funds and all ESG products were on the periphery, limited to extremely high net worth clients. Thus, typical retail investors often focused on the performance of different funds, failing to examine the composition of the funds they invested in, and whether each individual company contributed positively, or negatively, to society. Recognizing the rising demand, incumbent brokerages have begun to address investors’ desire to diversify their portfolios with impactful investments.

Currently, seven firms, including Schwab, E*TRADE, Fidelity and Merrill Edge, in Corporate Insight’s e-Monitor coverage group offer a socially responsible filter in their ETF screener. Each firm offers between 53 (Fidelity) and 62 (Schwab, E*TRADE and Scottrade) results. Schwab also provides a socially conscious ETF list, which is updated quarterly. Each fund on the list makes investment decisions based on the company’s environmental responsibility and human rights stance, avoiding companies in defense, alcohol, tobacco or gambling industries.

Fidelity’s Socially Responsible ETF Screener Criteria

In December, Morgan Stanley launched its digital advice platform—Access Investing—that promotes the ability to “invest in what matters to you.” The platform offers an Impact Portfolio that emphasizes ESG factors as well as a series of investing strategies that relate to different impactful topics including climate action and gender diversity. Most of the portfolios combine both passively managed ETFs and actively managed mutual funds.

Morgan Stanley’s Access Investing Portfolio Options

Also of note is TIAA’s Impact Portfolio, which is offered as part of the firm’s robo-advisor. The portfolio emphasizes investing in mutual funds that meet SRI criteria. While the firm does not offer a passively managed ESG option, TIAA remains the only discount brokerage that Corporate Insight tracks to emphasize socially responsible investing in its digital advice offering. The addition of socially conscious portfolios to these digital advice platforms brings the topic of ESG further into the limelight, ensuring that impactful investing is available to the mainstream population.