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FUND COMMENTARY

How our team analyzes ESG

12/20/2022

Another discussion with the manager of the new Thrivent Small-Mid Cap ESG ETF and how he makes holistic ESG investment decisions.

Podcast transcript

Coming up, analyzing each category of ESG as it applies to Thrivent Small-Mid Cap ESG ETF.

(Music)

From Thrivent Asset Management, welcome to episode 41 of Advisor’s Market360. A podcast for you, the driven financial advisor.

It’s hard to believe that, following this one, we only have one more episode this year. 2022 has been a whirlwind and we’ve been sprinting to the finish line. Advisors – keep up the good work and finish the year strong! And know that we appreciate your listenership during this busy season.

On today’s episode, we’re going to share how our investment team approaches ESG in the context of our new Thrivent Small-Mid Cap ESG ETF. You may remember our introduction to the Fund back in episode 38. As a reminder, this ETF, which launched in October, is actively managed and invests in small- and medium-sized companies who have a demonstrated commitment to ESG initiatives and furthering sustainable business practices.

If you’ve been meaning to brush up on ESG – environmental, social and governance – we hope this episode will be helpful. How does the management team analyze companies through the lens of ESG when researching potential investments? Where does the criteria come from? Listen on to find out as we hear once again from Senior Portfolio Manager Chad Miller, CFA.

(Music transition)

Miller began by spelling out what ESG means as it applies to this Fund, and he also broadly explained the overall investment philosophy that he and team adhere to.

“We utilize a holistic ESG process in analyzing our companies. So, we're not focused on one specific element of ESG, but rather a holistic approach to what companies are doing across environmental, social and governance, and within that, each of the individual stakeholders. We're looking for companies that can successfully serve the individual needs of their end stakeholders. And we also leave the flexibility in our process to understand that there are certain challenges and issues in the world right now that these companies are working through trying to solve. And what we really want to see from these companies is an acknowledgment of these individual issues and a plan to go and address those over time.”

We asked for a letter-by-letter breakdown of how he analyzes E, S and G topics within potential companies to be included in the Fund, starting at the beginning with E—environmental.

“In our environmental research, we're analyzing how a company is impacting the environment and what strategies they have to reduce this impact over time. So, we're focusing on things like emissions efficiency and ultimately emission reduction strategies over the long term. We're focused on water usage; impact on biodiversity; we're also trying to find those companies who can invest in circular business practices. and the idea that some end use products that used to be wasted in the past can be recovered and reused back in that company's business operations. We always like to see companies that are measuring these data points to start because eventually, if they're measuring these individual categories, they can manage to it over time and ultimately reduce these impacts.”

Then, we moved on to S, which stands for social.

“One concept we utilize to tackle the social topics is a concept we call ‘unpacking social.’ There's a lot of individual components and topics that feed into the social category in E, S and G, and so the approach we've taken to get a better understanding and ultimately analysis of this category is we break that down into the four stakeholders that comprise the social category, those being the employees, your customers, your suppliers and the communities you do business in. And so, what that allows us to do is dive into the individual topics and things companies need to do to successfully serve these individual stakeholders, as opposed to just looking at it as one overarching bucket, calling it social, looking at one element and trying to move on. We can dive in with more granular detail and understand the individual elements that we need to make an assessment on to make an effective investment in these companies.”

And the final letter in ESG: G, for governance.

“Within governance, we focus on accountability and alignment. And so, we like to see accountability to stakeholders as well as shareholders. We're looking for an independent board, we're looking for effective disclosures. When we look at governance from an alignment perspective, we're typically analyzing pay practices. We're analyzing, are the companies considering their stakeholders in their long-term investment decisions? And we really focus in on capital allocation because we know the investments that these companies are making today ultimately become our returns in three to four years. So, we really want to see companies that have a robust process around capital allocation and a right to win in the areas where they're making investments.”

(Music transition)

How does Miller and his management team actually perform these ESG analyses? What tools do they use to attach hard numbers to the criteria that they’re for? The answer lies within another acronym: SASB.

“One tool we utilize to help us identify the most financially material ESG topics a company should address is the SASB Financial Materiality map, and this is a toolkit that has been developed over the years by SASB. SASB stands for the Sustainable Accounting Standards Board, and this is a nonprofit organization that's been around for a little over a decade now.

“And what they realized is that, as these issues become more and more important, it's helpful for investors and other financial markets participants to have a baseline of topics that companies need to address and provide information on. And typically, after we look at our stakeholder analysis, combining this with the SASB financial materiality topics, we can zero that down into two or three really big topics the company needs to get right in order to ensure their business outlook is strong into the future.

“And once we've identified these two to three issues, we can then take those and engage with the company on the relevant topics, ask them if we need to see further information, if they're effectively serving the concerns of these topics, if they need to potentially adjust their strategy or make changes to how they're conducting themselves currently. And so, we can directly feed that into our valuation model and ultimately our assessment of long-term valuation for the company.

(Music)

That’s it for today! We hope you found this discussion of ESG and the new ETF valuable.

Thanks for listening to this episode of Advisor’s Market360™. All episodes are available on Apple Podcasts, Spotify, and Google Podcasts. Email us at podcast@thriventfunds.com with your feedback, questions and topic suggestions for future episodes. We’re also looking for stories from financial advisors about times when you’ve made an impact in your clients’ lives! Email us your story at podcast@thriventfunds.com and it could be featured in a future episode. You can learn more about us at thriventfunds.com and find other insights of interest to you, the driven financial advisor. Bye for now.

(Disclosures)

This ETF is different from traditional ETFs. Traditional ETFs tell the public what assets they hold each day. This ETF will not. This may create additional risks for your investment. For example: you may have to pay more money to trade the ETF’s shares. This ETF will provide less information to traders, who tend to charge more for trades when they have less information. The price you pay to buy ETF shares on an exchange may not match the value of the ETF’s portfolio. The same is true when you sell shares. These price differences may be greater for this ETF compared to other ETFs because it provides less information to traders. These additional risks may be even greater in bad or uncertain market conditions. The ETF will publish on its website each day a “Proxy Portfolio” designed to help trading in shares of the ETF. While the Proxy Portfolio includes some of the ETF’s holdings, it is not the ETF’s actual portfolio. 

The differences between this ETF and other ETFs may also have advantages. By keeping certain information about the ETF secret, this ETF may face less risk that other traders can predict or copy its investment strategy. This may improve the ETF’s performance. If other traders are able to copy or predict the ETF’s investment strategy, however, this may hurt the ETF’s performance. For additional information regarding the unique attributes and risks of the ETF, see the Principal Risks section of the prospectus.

Additionally, the ETF is newly formed and does not have any operating history. Small and medium-sized companies often have greater price volatility, lower trading volume, and less liquidity than larger, more established companies. The Fund’s value is influenced by a number of factors, including the performance of the broader market, and risks specific to the Fund’s asset classes, investment styles, and issuers. Markets may also be impacted by domestic or global events, including public health threats, terrorism, natural disasters or similar events. ESG strategies may result in investment returns that may be lower than if decisions were based solely on investment considerations. Because ESG criteria exclude certain securities and products for non-financial reasons, investors may forego some market opportunities available to those who do not use these criteria. ETFs trade like stocks, are subject to investment risk, and will fluctuate in market value. Unlike mutual funds, ETF shares are not individually redeemable directly with the Fund, and are bought and sold on the secondary market at market price, which may be higher or lower than the ETF's net asset value, or NAV. Transactions in shares of ETFs will result in brokerage commissions, which will reduce returns. Investors also may incur the cost of the spread between the price at which a dealer will buy shares and the somewhat higher price at which a dealer will sell shares. The Adviser's assessment of investments and ESG considerations may prove incorrect, resulting in losses, poor performance, or failure to achieve ESG objectives. The Adviser is also subject to actual or potential conflicts of interest.

The views expressed are as of October 4, 2022, may change as market or other conditions change, and may differ from views expressed by other Thrivent Asset Management, LLC associates. Actual investment decisions made by Thrivent Asset Management, LLC will not necessarily reflect the views expressed. The commentary should not be considered as investment advice or a recommendation of any particular security, strategy, or product.

The concepts in this presentation are intended for educational purposes only. They may not be suitable for your clients’ particular situation. The suitability of any specific product or strategy will be dependent upon your clients’ particular situation.

Investing involves risks, including the possible loss of principal. The prospectus and summary prospectus contain more complete information on the investment objectives, risks, charges and expenses of the fund, and other information, which investors should read and consider carefully before investing. Prospectuses and summary prospectuses are available at thriventETFs.com.

ALPS Distributors, Inc. is the distributor for Thrivent ETF Trust. Thrivent Distributors, LLC is a marketing agent. Thrivent Asset Management, LLC, an SEC-registered investment adviser, serves as the investment adviser for the Thrivent ETF Trust. Thrivent Distributors, LLC and Thrivent Asset Management, LLC are subsidiaries of Thrivent, the marketing name for Thrivent Financial for Lutherans. ALPS Distributors, Inc. is not affiliated with Thrivent or any of its subsidiaries.


This ETF is different from traditional ETFs. Traditional ETFs tell the public what assets they hold each day. This ETF will not. This may create additional risks for your investment. For example:

 - You may have to pay more money to trade the ETF’s shares. This ETF will provide less information to traders, who tend to charge more for trades when they have less information.

 - The price you pay to buy ETF shares on an exchange may not match the value of the ETF’s portfolio. The same is true when you sell shares. These price differences may be greater for this ETF compared to other ETFs because it provides less information to traders.

 - These additional risks may be even greater in bad or uncertain market conditions.

 - The ETF will publish on its website each day a “Proxy Portfolio” designed to help trading in shares of the ETF. While the Proxy Portfolio includes some of the ETF’s holdings, it is not the ETF’s actual portfolio.

The differences between this ETF and other ETFs may also have advantages. By keeping certain information about the ETF secret, this ETF may face less risk that other traders can predict or copy its investment strategy. This may improve the ETF’s performance. If other traders are able to copy or predict the ETF’s investment strategy, however, this may hurt the ETF’s performance. For additional information regarding the unique attributes and risks of the ETF, see the Principal Risks section of the prospectus.

The ETF is newly formed and does not have any operating history. Small and medium-sized companies often have greater price volatility, lower trading volume, and less liquidity than larger, more established companies. The ETF’s value is influenced by a number of factors, including the performance of the broader market, and risks specific to the Fund’s asset classes, investment styles, and issuers. Markets may also be impacted by domestic or global events, including public health threats, terrorism, natural disasters or similar events. ESG strategies may result in investment returns that may be lower than if decisions were based solely on investment considerations. Because ESG criteria exclude certain securities/products for non-financial reasons, investors may forego some market opportunities available to those who do not use these criteria. ETFs trade like stocks, are subject to investment risk, and will fluctuate in market value. Unlike mutual funds, ETF shares are not individually redeemable directly with the Fund, and are bought and sold on the secondary market at market price, which may be higher or lower than the ETF’s net asset value (NAV). Transactions in shares of ETFs will result in brokerage commissions, which will reduce returns. The Adviser’s assessment of investments and ESG considerations may prove incorrect, resulting in losses, poor performance, or failure to achieve ESG objectives. The Adviser is also subject to actual or potential conflicts of interest. These and other risks are described in the prospectus.

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