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Is there a financial benefit to doing business mindfully?
Early in August, the U.S. Business Roundtable, an influential corporate interest group, announced that it was redefining the purpose of a corporation. From now on, group members commit to lead their companies “for the benefit of all stakeholders: customers, employees, suppliers, communities and shareholders.”
For anyone dismayed by rising inequality, environmental destruction, or any of a host of other social ills, the announcement probably sounded like a nice first step, but many people have long wanted Big Business to put its money where its mouth is. If that includes you, there may be an ETF for that.
The Conscious Companies ETF KRMA, +0.65% , from a company called Global X, offers the chance to “invest in well-managed companies that achieve financial performance in a sustainable and responsible manner and exhibit positive Environmental, Social and Corporate Governance (ESG) characteristics.” To do that, KRMA offers exposure to companies achieving positive outcomes for 5 key stakeholders: customers, suppliers, investors, local communities, and employees.
Global X launched the fund in 2016 after seeing a gap in the existing ESG (environmental, social and governance investing) landscape, said Jay Jacobs, the company’s head of research and strategy. Most ETF options at that time were, in Jacob’s words, “benchmark-hugging.” That is, they took a broad index, like the S&P 500, and just stripped out bad actors.
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But Global-X wanted to come up with a set of ESG companies inclusively, not by default. The team looked to the principles espoused in the movement known as “Conscious Capitalism.” That idea started with a book co-written by Whole Foods founder John Mackey and Raj Sisodia, a business professor.
“…Free enterprise capitalism is the most powerful system for social cooperation and human progress ever conceived. It is one of the most compelling ideas we humans have ever had. But we can aspire to even more.”
KRMA’s index provider was tasked with coming up with a list of companies to achieve those ideals. They use a mixture of public data sources, like surveys on the best companies to work for, as well as private ESG data providers on topics like relationships with suppliers, trustworthiness of CEOs, and more. The index also takes into account a company’s consistency over time, Jacobs told MarketWatch.
At first glance, that methodology seems to produce some unexpected results. The fund’s top ten holdings currently include three pharmaceutical companies, two regional electrical utilities, and Hershey Co. HSY, +0.99% That’s because the fund isn’t aiming to make “sector bets,” Jacobs told MarketWatch, adding that it will generally behave like most U.S. equity funds, but “more refined.”
Some investors may also find the approach a bit nebulous. Global X produces multimedia materials, like a webinar, to explain its “multi-stakeholder operating system,” which the company defines as “how a firm manages its relationships with employees, customers, suppliers, investors, and communities.” The materials have plenty of individual examples of this “multi-stakeholder” approach in action, including Costco’s “strong relationship with employees” for example, but it may be hard to visualize the overall big picture.
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Tensie Whelan, director of the Center for Sustainable Business at the NYU Stern School of Business, told MarketWatch that KRMA’s approach looks solid, but she cautioned that investors should know what they’re buying. Because KRMA is agnostic about sectors, some investors may be surprised that the holdings aren’t the typical “impacting investing” core holdings — clean energy, for example.
Whelan has conducted research quantifying how certain companies improved their returns by adopting sustainable practices. She wants to encourage companies to consider what she calls a “return on sustainability investment,” and expects that eventually principles like the ones espoused in conscious capitalism will become the default.
KRMA has about $66 million under management, according to the fund web site. It’s returned 16.04% in the year to date, according to FactSet, and charges a management fee of 0.43%.
The benchmark S&P 500 SPX, +0.69% is up 15.0% year-to-date.