Last week I surveyed global equity exchange traded funds (ETFs) offered by local asset managers to South African investors. These so-called “feeder” funds track a global equity index but are denominated in rands, which means that your returns are a function of both the performance of the underlying assets and the rand-dollar exchange rate.
This week I focus on a subset of global equity ETFs – those that invest in socially responsible companies that score highly on environmental, social and governance (ESG) factors. I have in mind investors who, while wanting decent returns, prefer investing in companies that are, at best, beneficial to society and the environment, and at worst, at least not doing harm.
There are two approaches to investing in “good” companies, ESG and SRI (socially responsible investing):
• ESG investing is performance driven. According to index provider MSCI, this approach takes into account the ways in which ESG risks and opportunities can affect a company’s profitability and sustainability. In other words, the approach is on how well or badly a company is expected to perform when examined through an ESG lens.
• SRI or “impact investing” is morally driven. MSCI says it “puts a premium on positive social change by considering both financial returns and moral values in investment decisions. This strategy emphasises financial returns as a secondary consideration after the investors’ moral values have been accounted for in their decision-making.”
The problem with both approaches is how companies are measured. A company might score well under one criterion and dismally under another. For example, Coca-Cola, one of the world’s major plastic polluters, is one of the top companies in the MSCI World SRI Select Reduced Fossil Fuel Index, mentioned below. So don’t be fooled into thinking all underlying investments are squeaky clean.
There are three global ETFs and one emerging market ETF available, each tracking a different index, although only the emerging market ETF has a distinctly different portfolio of shares.
1nvest MSCI World SRI Index Feeder ETF
This fund tracks the MSCI World SRI Select Reduced Fossil Fuel Index. The index, derived from the MSCI World Index, includes 407 large and mid-cap shares across 23 developed-market countries. The fund fact sheet states: “It aims to represent the performance of companies that are consistent with specific values and climate change-based criteria, and those that exhibit a high minimum level of ESG performance.” The fund actively excludes companies in industries related to weapons and firearms, tobacco, alcohol, gambling, adult entertainment, nuclear power, genetically modified organisms, and power generation from fossil fuels.
• Annualised performance in rands to March 31 since launch in July 2022: 25.1%
• Annualised volatility of the index over five years (USD): 18.5%
• Top three countries: US 62.0%, Japan 7.3%, Canada 4.1%.
• Top three holdings: Microsoft 4.5%, Tesla 3.5%, Novo Nordisk 2.9%
• Total annual investment cost: 0.38%
Satrix MSCI World ESG Enhanced Feeder ETF
This fund tracks the MSCI World ESG Enhanced Focus CTB (Climate Transition Benchmarks) Index. Derived from the MSCI World Index, its parent index, it includes 1 339 large and mid-cap shares across 23 developed-market countries. According to MSCI, it “is designed to maximise exposure to positive ESG factors while reducing the carbon equivalent exposure to carbon dioxide and other greenhouse gases as well as their exposure to potential emissions risk of fossil fuel reserves by 30%. It aims to exceed the minimum technical requirements laid out by the European Union’s Climate Transition Benchmarks.
• Annualised performance in rands to March 31 since launch in September 2020: 15.8%
• Annualised volatility of the index over five years (USD): 18.3%
• Top three countries: US 67.6%, Japan 6.7%, Canada 4.4%
• Top three holdings: Microsoft 4.9%, Nvidia 3.6%, Apple 3.5%
• Total annual investment cost: 0.33%
Satrix MSCI EM ESG Enhanced Feeder ETF
This fund tracks the MSCI Emerging Markets ESG Enhanced Focus CTB Index. The index measures the performance of 1 273 companies in 27 emerging-market countries, screening out controversial businesses and giving greater weighting to companies with higher ESG scores.
• Annualised performance in rands to March 31 since launch in September 2020: 3.6%
• Annualised volatility of the index over five years (USD): 19.3%
• Top three countries: China 25.4%, Taiwan 19.4%, India 17.4%
• Top three holdings: Taiwan Semiconductor Manufacturing 10.1%, Samsung Electronics 4.5%, Tencent Holdings 3.0%
• Total annual investment cost: 0.38%
Sygnia Itrix S&P Global 1200 ESG ETF
This tracks the S&P Global 1200 ESG Index, which measures the performance of 799 companies across the globe that meet sustainability criteria while maintaining similar industry sector weightings as its parent S&P Global 1200 Index. It excludes companies involved in weapons manufacture, tobacco, thermal coal and those that don’t comply with UN Global Compact criteria. Remaining companies are selected according to their ESG scores.
• Annualised performance in rands to March 31 since launch in April 2021: 17.5%
• Annualised volatility of the index over five years (USD): 17.8%
• Top three countries: US 66.2%, Japan 6.3%, UK 3.9%
• Top three holdings: Microsoft 6.5%, Apple 5.2%, Nvidia 4.6%
• Total annual investment cost: 0.41%
* Hesse is the former editor of Personal Finance
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