When we first wrote about ethical ETFs, the options available to investors were fairly limited, with a range of ETFs that had screeners excluding tobacco and weapons manufacturers the only options available. Perfect if weapons and big tobacco are where your ethical boundaries lie, but not much good for those wanting to invest ethically in Australian markets, where no weapons or tobacco producers even exist within the broader S&P ASX 200 index. Betashares changed the game early last year with their globally focused Global Sustainability Leaders ETF (ETHI), which had much stricter ethical definitions. They followed that up in November when they launched the Australian focused equivalent, the Betashares Australian Sustainability Leaders ETF (FAIR). Below we take a look at FAIR.
Launched in November 2017, with management costs of 0.49%pa, FAIR applies a broad range of negative and positive screeners to the Australian share market to provide what they deem to be an ethical portfolio. FAIR tracks the Nasdaq Future Australian Sustainability Leaders Index. An index developed recently by Nasdaq, specifically for Betashares use.
Unlike some of the other ethical ETFs available, Betashares screens companies for participating in a wide range of activities deemed unethical, with the companies excluded if they participate in any of the following:
The above is a comprehensive list and to ensure companies with indirect exposure are not excluded, there are some exceptions, for example, a company must derive no more than 20% of their revenue from alcohol production or sales, meaning retailers who sell alcohol may not be excluded if alcohol sales are only a small proportion of their total revenue.
It’s reasonably common and simple to apply exclusion criteria such as the above, however what really makes FAIR a true to label ethical ETF is its inclusion of ‘positive screeners’. This means the index applies a higher weighting to those companies they deem to be positively contributing to ethical practice. They call these companies ‘sustainability leaders’ and the criteria a company must meet to be deemed a sustainability leader are one of the following:
Not all companies included in the index need to meet the ‘sustainability leader’ criteria, however companies that do are prioritised in the index.
To ensure the fund remains well diversified, there is a 4% maximum weighting to any one company, and a 10 company limit to any specific sector. A minimum market capitalisation of $100m applies to any company included in the index, and minimum liquidity levels apply.
There’s currently 83 companies represented in the index, the full list available to view on the Nasdaq website. The obvious observation is that none of the big banks or miners are included in the index, the companies that make up over 50% of the S&P ASX 200. The lack of big miners is likely obvious, due to their exposure to fossil fuels. The fossil fuel screener also includes the biggest financers of fossil fuel companies, and with an economy built on resources, the big banks are the obvious financers for these types of companies.
Because of the above, only one company in the ASX top 10 companies by market capitalisation is represented in FAIR, medical company CSL, all other companies do not pass the screening criteria.
The lack of these big companies means a much different sector allocation of FAIR compared to the S&P ASX 200 index. The below chart compares the sector allocations of each.
It can be seen the lower allocations to the big two ASX 200 sectors, Financials and Materials are offset by much higher allocations to Health Care, Real Estate, Telecommunications and Information Technology, giving investors a less sector concentrated portfolio than the ASX 200.
There’s no doubt ethical investing has moved from the fringes to the mainstream in just a few years, as more investors seek to have their investment decisions align to their core beliefs. FAIR has raised over $50m since launching at the end of November 2017, a significant sum for a new ETF, combined with $120m for its global sister fund, ETHI, demand for ethical options is on the rise. We think all the ETF providers will be watching this closely and expect to see more ethical options become available to investors sooner rather than later.