If you’ve seen Sir. David Attenborough’s “A Life On Our Planet” on Netflix, you’ll know that he makes a very compelling case for moving towards a future where humans can live in harmony with the Earth. If you haven’t seen it, do yourself a favour and watch the great man in action. You won’t be disappointed.
With all of Sir. David’s great points fresh in my mind, I got to thinking. How can I invest sustainably? After all, investing allows us to align our values with our money. That’s how the idea for this article came about, let’s move onto the what!
Firstly, what is ESG investing?
ESG is short for environmental, social, and corporate governance. In a nutshell, ESG investing is a class of investing that considers non-financial factors that impact an assets sustainability and societal impact.
Investors are becoming increasingly conscious of where they’re investing their money
Thanks to people like Sir. David, investors are becoming increasingly conscious of where they’re investing their money. Morgan Stanley’s 2019 Sustainable Signals Study stated that 85% of individual investors are interested in sustainable investing. That figure is up 10% from 2017! Meanwhile, 95% of millennials are interested in sustainable investing, up 9% from 2017.
Fortunately, it seems supply has kept up with demand in this space. Retail Investors have never had more options to invest with ESG factors at the core of their investing decisions.
In this article, I’ll be unpacking the three ASX listed ETF’s (listed below) that aim to track the returns of three different international indexes focused on ESG investing. You can click the links below to read about each ETF individually, their key facts or skip directly to my verdict ⬇️.
- Vaneck Vectors MSCI International Sustainable Equity ETF (ASX:ESGI)
- The BetaShares Global Sustainability Leaders ETF (ASX:ETHI)
- Vanguard Ethically Conscious International Shares Index ETF (ASX:VESG)
- Key Facts Comparison Table (ESGI vs ETHI vs VESG)
- Jesse’s Verdict
Why ESG investing is subjective, and why you should care
As it turns out, ESG investing is far from black and white. What may sound like ESG practices to you, may not be to someone else. Let’s use Facebook as an example.
Facebook will no longer be included in the S&P ESG Index. The index tracks companies that practice good environmental, social and governance policies. The indexer (S&P) said it made the move due to Facebooks deteriorating “environmental reporting” and “policy influence” scores.
Although Facebook isn’t selling tobacco, some of its business activities are deemed unethical by certain individuals and/or organisations. And because not all of us agree, Facebook’s position on the ESG ladder remains up for debate. Therefore, so does its place in ETFs focused on ESG.
I could literally go on for pages and pages continuing to debate what an ESG company actually looks like through my eyes. Instead, I’m going to and leave it up to you to decide whether or not the companies and industries represented in each ETF are practicing ESG principles. It’s subjective after all!
Are you a new investor? Do you want to know more about ETFs?
Before I unpack my favourite ASX listed ETFs for Global ESG investing, here’s a link to an investing basics article I wrote about the fundamentals of ETF’s in case you needed a refresher on ETFs before we get into specific ETF talk.
Key Facts (ESGI vs ETHI vs VESG)
First things first, here’s a lovely table identifying some key facts about each ETF I’ll be writing about. I’ll be referring back to these facts as I move through the article, so feel free to skim over this!
Table #1 – ESGI, ETHI & VESG Key Facts as of 31/05/2021
|Management Fee P.A||0.55%||0.59%||0.18%|
|Dividend Reinvestment Plan (DRP)||✔||✔||✔|
|1yr Gross Return (including dividends)||16.73%||23.08%||20.85%|
|Return Since Inception|
|Assets Under Management (AUM)||$80.4M||$1.47B||$302.5 M|
|Number Of Holdings||142||200||1,608|
|Weighting Methodology||Market Cap Weighted (individual stocks capped at a 5% weighting.)||Market Cap Weighted (individual stocks capped at a 4% weighting.)||Market Cap Weighted (individual stocks are not capped)|
|Top 10 Holdings||Home Depot Inc/The, |
Novo Nordkisk, Amgen Inc, Blackrock Inc, Sony Corp, Allianz SE, Gilead Sciences Inc, Automatic Data Processing, Schneider Electric, Marsh & Mclennan & Adidas AG
|Nvidia Corp, Apple Inc, Visa Inc, Home Depot Inc/The, Paypal Holdings Inc, Mastercard Inc, Adobe Inc, ASML Holdings NV, Toyota Motor Corp & Cisco Systems||Apple Inc, Microsoft Corp, Alphabet Inc, Amazon.com Inc, Facebook Inc, JP Morgan & Chase Co, Tesla Inc, Samsung Electronics Co. Ltd, UnitedHealth Group Inc, Visa Inc.|
|Top 10 Holding Concentration||31.1% of the total ETF holdings.||32.7% of the total ETF holdings.||20.3% of the total ETF holdings.|
1. VanEck Vectors MSCI International Sustainable Equity ESG ETF (ASX:ESGI)
Vaneck’s Sustainable Equity ETF is designed to track the returns of the MSCI World ex Australia ex Fossil Fuel Select SRI and Low Carbon Capped Index. I know, it’s a mouthful.
What makes an ESGI An ESG ETF Anyway?
A popular way for index and ETF providers to build ESG ETFs is through positive and negative screens. MSCI, the index provider for ESGI complete a negative screen by excluding companies that do not align with their ESG frameworks. They also complete a robust positive screen for high ESG performers. Similarly, ETHI and VESG have screening processes of their own, but more on them later.
ESGI: A winner for international diversification.
ESGI is a truly global ETF. It includes 142 companies from across the globe (ex-Australia). In terms of sectors, it’s most heavily weighted towards financials (27.7%), and closely followed by health care (21.2%).
With only 36.3% exposure to North American companies, ESGI boasts the best regional diversification. By comparison to ETHI and VESG have 68.8% and 71.0% of their constituents listed in North America.
ESGI also applies a 5% individual stock weighting cap, which helps make for a much more diversified product.
Here’s what companies are included in ESGI
MSCI applies a positive screen for companies with the lowest carbon exposure and best ESG performance in each sector. This is based on MSCI’s SRI (socially responsible investing) indexes Methodology.
The screen involves the selection of companies based on numerous ESG criteria including but not limited to supply chain management, animal cruelty, diversity, labour standards + more. Only the best performing company’s on MSCI’s filters are selected for the index. Winning!
Companies not included in ESGI
As you’d expect from any ESG based ETF, ESGI does not include any organisations that are involved with obvious non-ESG activities like thermal coal production or oil and gas-related activities.
More specifically, ESGI does not include any companies that are involved in activities that are not socially responsible investments. Companies that are involved in or exposed to the following activities are excluded from the index, and therefore ESGI:
- Armaments (military weapons/arms);
- Genetically modified organisms and;
- Companies that own any fossil fuel reserves.
Want to know more about ESGI?
You can check out the latest ESGI fact sheet if you’re keen on doing some further reading.
2. Betashares Global Sustainability Leaders ESG ETF (ASX:ETHI)
Listing in 2017, Betashares were the first to list a globally diversified ESG focused ETF in Australia. ETHI, short for ethical, tracks the returns of the Nasdaq Future Global Sustainability Leaders Index.
One thing that stands out about ETHI is the significantly larger pool of assets under management in compassion to ESGI and VESG. Part of the reason for that is down to Future Super. Future Supers 2019 Annual Report stipulates that roughly 27 per cent of their assets under management would be allocated to ETHI. Interestingly, another 36% of their portfolio was allocated to Betashares local ESG ETF, FAIR.
Future Super also sits on the investment committee for both ETHI and FAIR. An interesting nuance and one investors should be aware of before taking a position in ETHI.
ETHI is outperforming its peer ESG ETFs
In terms of performance, ETHI is a clear standout amongst its peers. Since their listing in 2017, ETHI has delivered investors an impressive return of 23% per annum.
ETHI’S superior performance is predominantly down to two things. Firstly, ETHI is highly concentrated in U.S. tech stocks like Apple, NVIDIA and Visa. And It’s no secret these companies have all performed spectacularly in recent years!
Secondly, ETHI has a whopping 39.4% of assets invested in the IT sector. Considering the IT sectors recent outperformance, ETHI’s returns have certainly benefited handsomely. By comparison, ESGI and VESG have 3.2% and 21.6% of assets under management allocated to the IT sector respectively.
Here’s what companies are included in ETHI
Like ESGI, ETHI has very stringent criteria for the companies selected to represent the index. ETHI has a positive screen applied to it for organisations classified as Climate Leaders. Climate leaders are defined by Betashares as companies that place them in the top third of companies in terms of carbon efficiency in their respective industries. The criteria for evaluating whether a company can be classified as a Climate leader is based on three key areas:
- Carbon Impact – Total greenhouse gas used in operations divided by total revenue;
- Avoided Emissions – Companies involved in reducing greenhouse gas emissions through innovative technologies (i.e. renewable energies) and;
- Fossil Fuel Screen – Removal of companies directly involved in the fossil fuel industry and any removal of any companies directy exposed to companies who are.
Companies Not Included in ETHI
ETHI also has a negative screen applied to it. Any companies involved in the following activities are not eligible from part of the index that ETHI is based on:
- Armaments (military weapons/arms);
- Uranmium and nuclear energy;
- Junk Foods;
- Mandatory detention of asylum seekers;
- Human rights and supply chain concerns and;
- Lack of board diversity i.e. lack of gender diversity.
ETHI Fact sheet
3. Vanguard Ethically Conscious International Shares ESG ETF (ASX:VESG)
Lastly, we come to Vanguards entrant in the Global ESG ETF space, VESG. VESG is designed to track the returns of the FTSE Developed ex Australia Choice Index.
VESG largely mirrors VGS (Vanguard’s ASX listed global shares ETF) in terms of top 10 holdings, regional and sector exposure. The main differentiator between the two is that VESG applies a negative screen. The screen excludes organisations involved in industries like tobacco, fossil fuels, alcohol + more below. As a result, the Top 10 holdings in VESG, look very similar to those in VGS, leading to similar investment returns.
Here’s what companies are included in VESG
VESG does not perform a positive screen. That means companies like Facebook and Alphabet (for example) are granted permission into the index. While these companies don’t fall directly into the category of traditional non-ESG industries like fossil fuels and tobacco, they are facing question marks around data collection, privacy and antitrust issues. So keep that in mind when considering VESG.
VESG is the cheapest ESG ETF. By A lot.
Given the selection criteria for VESG isn’t as rigorous in comparison to ESGI and ETHI, it becomes clearer why VESG has the lowest management fee (0.18% P.A) versus 0.55% for ESGI and 0.59% for ETHI. In summary, if you’re not too fussed about a positive screen, then VESG provides a cheap way to invest somewhat ethically.
Companies not included in VESG
VESG’s negative screen excludes companies involved in the following activities:
- Fossil fuels;
- Nuclear power;
- Adult entertainment and;
- Conduct related to screen based on severe controversies.
VESG FACT SHEET
For further reading on VESG, you can download a copy of its fact sheet here.
My ESG ETF Verdict
If it’s my opinion you’re after, then you’ve got it. To sum up, ESGI is the pick of the bunch in my view. Apart from the management fee, ESGI ticks every box. It applies both a positive and negative screen, it’s well-diversified across regions and sectors, it’s produced healthy returns and it’s assets under management are adequate (for my money at least).
If price is a concern, VESG could be the way to go. Just remember, you’re doing it at the expense of a positive screen. With that said, if you’re happy with the standard negative screen, then VESG could be for you!
ETHI has provided investors with amazing returns, and it applies both a positive and negative screen. Tick, tick tick! That said, it’s the most expensive ETF of the three, and it’s the least diversified, which is a detractor for me.
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About The Author – Jesse
Hi, I’m Jesse, but you can call me Jes for short. My passion is simple, I’m on a mission to make the world of investing easily understood by removing the ‘too hard basket’ stigma that surrounds it.
Disclaimer: This website (the “The Money Pal”) is published and provided for informational and entertainment purposes only. The information in the Blog constitutes the Content Creator’s own opinions and it should not be regarded as financial advice.