By: DeFred G. FoltsIII Chief Investment Strategist & Eric Biegeleisen, CFA® Managing Director, Research
3EDGE Asset Management (“3EDGE”) is a quantitative, tactical investment firm, constructing globally diversifiedportfolios through the use of index Exchange Traded Funds (ETFs). The firm manages approximately $900M in AUM. President and CIO, Steve Cucchiaro, and other senior partners are well known in the field of constructing dynamic ETF strategies.
Global sustainable investments reached $30.7 trillion in AUM at the start of 2018, an impressive 34% increase in two years (see chart). There is little doubt that ESG (Environment, Social, and Corporate Governance) and SRI (Socially Responsible Investing) are here to stay. ETFs are now taking their place as a legitimate segment of the ESG/SRI universe, providing investors an opportunity to align their investments with their desire to have a positive impact on society.
ETF Selection Methodology
When considering which ETFs to incorporate into our ESG-focused strategy, 3EDGE utilizes a variety of data for security selection including climate change, environmental opportunities, human capital, stakeholder opposition, corporate governance and corporate behavior.
Scores are generated for each of the underlying securities and rolled up at the ETF level. Any ETF can have an ESG score by simply weighting and aggregating its underlying holdings. In addition, we payclose attention to liquidity and expense ratios.
One way that ETF issuers have been able to increase the score of ESG-focused ETFs is by excluding certain companies or industries that tend to drag down the score, or conversely increasing the share of SRI investments. This may include avoiding exposures to companies engaged in alcohol, civilian firearms, gambling, nuclear power, GMOs, and tobacco.
Our approach also places an added emphasis on a firm’s carbon footprint, or its weighted average carbon intensity measured in tons of carbon dioxide emissions per million dollars of sales. The lower this figure, the less the firm generates pollutes the Earth’s atmosphere with carbon emissions. As with ESG scores, these values are assigned to each individual company and can be aggregated up to the ETF level to provide a single number to represent equity and fixed income products.
It is clear that ESG and SRI-focused investing is not a fad and is likely to grow at a rapid clip for the foreseeable future. As investor demands have evolved, so have investment solutions. At 3EDGE, we believe that there is now an opportunity for investors with ESG goals to also fulfill their need for tactical investing. As most major economies enter a late-cycle, volatility is likely to return to markets, making portfolio diversification and risk management a priority. A tactical ESG approach could prove to be a good solution under these circumstances. Feel free to contact us if we can help with your ESG investing needs.
DISCLOSURES: The opinions expressed by DeFred G. Folts III and Eric Biegeleisen of 3EDGE are provided for informational purposes only and are subject to change without notice. They are not intended to provide personal investment advice. Investors should only seek investment advice from their individual financial adviser. Observations include information from sources 3EDGE believes to be reliable, but the accuracy of such information cannot be guaranteed. Investments including ETFs, common stocks, fixed income and commodities involve the risk of loss that investors should be prepared to bear. Past performance may not be indicative of future results.