Environmental, social and governance, or ESG, ETFs may have picked up in popularity in the last few years, but investors are still confused when it comes to understanding the nuances of a fund's ESG factors. One solution may be standardizing the criteria used for each fund.
Regulating ESG disclosures would provide investors with a consistent set of information instead of leaving investors to sort through a variety of standards, S&P Global CEO and President Doug Peterson told CNBC's "ETF Edge" on Monday.
"One of the risks we had before was a complete alphabet soup of different organizations trying to standardize ESG disclosures," Peterson said.
Now the International Sustainability Standards Board is bringing all these groups together to create one single approach to ESG disclosures, Peterson said.
ESG isn't new to the corporate world. The World Economic Forum has a list of 21 ESG standards it created in 2019 for companies to use. Ninety-two percent of the S&P 500 and 70% of the Russell 1000 provide sustainability reports, according to a 2021 Governance and Accountability Institute report.
Still, Peterson predicts corporate America will be split on reorganizing their ESG reporting. He expects to hear concerns on potential litigation, the cost of ESG compliance and the difficulty for those in industries that are disfavored, such as emissions.
"The approach is what I call 'build a baseline and then build from there,'" Peterson said. "Get some simple things out there that people would start reporting, and then build from there to get more consensus and more out into the market."
Standardizing the ESG criteria might not be enough to make it easier for investors, ETF Trends and ETF Database head of research Todd Rosenbluth said.
Though ETFs can focus on narrow ESG standards — such as the SHE ETF for gender diversity or the ICLN for clean energy — there are also broader ESG ETFs, such as the EFIV. With the ETFs changing their holdings or tracking different benchmarks, it's difficult for investors to keep track, Rosenbluth said in the same interview.
"They're going to perform differently because they're either broad or narrow in construction," Rosenbluth said. "There's not going to be consistency. There are going to be different performance records for ESG ETFs, despite the fact that there's going to be some standardization of the underlying data."