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How transparency makes better market opportunities: NAACP ETF creator

Transparency is becoming ever more important to investing.

So says Marvin Owens, senior director of economic programs for the NAACP and one of the creators behind the Impact Shares NAACP Minority Empowerment ETF (NACP), as the diversity-focused fund grows in size and popularity.

“It’s important that we make the case that engaging with an organization like the NAACP and being more transparent about what’s happening is going to sort of create better opportunities in the market,” Owens told CNBC’s “ETF Edge” this week.

“The kind of engagement that’s resulted from this fund for us as the NAACP has [been] companies wanting to talk about, ‘What can we do to change? What can we do to improve in these areas around supplier diversity and recruiting more diverse candidates for C-suite opportunities?’ It’s the engagement that has allowed for improvement,” Owens said.

As investors become increasingly interested in ESG (environmental, social and governance), a set of criteria money managers use to try and invest in more sustainable or progressive companies, it’s not just about making commitments to these causes, Impact Shares’ Ethan Powell, also a co-creator of NACP, said in the same “ETF Edge” interview.

It’s also very much about transparency: Companies that are the most transparent about their inner workings tend to have a leg up when being scored for an ESG index, said Powell, who is Impact Shares’ founder and president.

That’s why Amazon, Microsoft, Apple and Alphabet are the NACP’s largest holdings — because those tech giants have some of the best data-reporting policies in place vis-a-vis their peers, Powell said.

“Mega-caps are disproportionately represented because, frankly, they’re the ones that are committing the resources not only to having these programs in place, but also reporting on the programs,” he said. “It’s a lack of transparency and data in a lot of cases … that ends up crafting who actually gets in the index.”

To Ben Johnson, director of global ETF research at Morningstar, ESG’s growth potential largely hinges on “data availability and the quality of data that is available,” he said in the same “ETF Edge” interview.

“Nine of the top 10 ESG ETFs right now account for about 70% of all the money that investors have put into these funds,” and they largely mirror the broader market with some small ESG-driven adjustments, Johnson said.

That means ESG ETFs with a narrower focus such as NACP have some catching up to do, he said. (While Johnson’s team isn’t directly involved in index-building, the NACP ETF uses Morningstar’s Minority Empowerment Index as its benchmark.)

“We’ve seen real meaningful flows into all of these funds in recent years,” Johnson said. “I think it’s a trend that’s only going to continue and I think the data and the definitions are only going to get better with time.”

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