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VanEck joins Ethical ETF realm with ESGI

ETF Watch - Mar 27, 2018

One of the emerging themes in investing is the desire for many investors to invest in line with their own ethical beliefs. Last year we saw Betashares successfully launch their International and Australian focused ethical / sustainable ETFs. VanEck is the latest fund manager to join the party, recently launching the VanEck Vectors MSCI International Sustainable Equity ETF (ESGI). Today we take a look at the fund and how it differs to the other ethical ETFs available.

What’s ESGI’s Mandate?

ESGI is an internationally focused ETF, investing in developed global markets (ex Australia). It caps exposure to any individual company to 5%. The underlying index being applied (MSCI World ex Australia ex Fossil Fuel Select SRI and Low Carbon Capped Index), is a combination of a number of other MSCI indexes, with the fund:

What do these indexes mean?

The fund essentially applies both a positive and negative screener to determine what companies it will invest in. This means, it both excludes companies it believes do not meet what is deemed to be sustainable, and also includes companies it believes to be highly sustainable. The negative screeners exclude companies involved in:

  • Fossil Fuels
  • Alcohol
  • Gambling
  • Tobacco
  • Military Weapons
  • Civilian Firearms
  • Nuclear Power
  • Adult Entertainment
  • Genetically modified Organisms.
  • High Carbon Emitters

On the flip side, the positive screeners include MSCI’s Environmental, social and governance (ESG) measures. Companies with high ESG ratings compared to their sector peers are deemed 'ESG leaders' and included in the index.

What does the underlying fund look like?

The top 10 holdings include names like Microsoft, Proctor and Gamble, Allianz, SAP, Accenture and Caterpillar. This is quite a different list than would appear in a pure market cap focused global ETF, with the global tech titans (excluding Microsoft) excluded. Only one (Microsoft) of the top 10 companies by market cap in the world are included in the top 10 holdings.

The US is the highest country represented at 32%, with Japan (11%), France (9%), Germany (9%) and the United Kingdom (8%) rounding out the top 5. A pure market cap focused product would see higher weightings to the US, at around 61%

From a sector perspective, Financials make up 23%, Health care 15%, Industrials 14%, IT 13% and Consumer Discretionary 13%. This is a reduced exposure to IT and higher exposure to Financials and Health care than the broad global indexes would provide.

How does ESGI differ to ETHI?

On the surface, both VanEck’s ESGI and Betashares ETHI look quite similar. Both are the only two globally focused ETFs available in Australia to apply positive and negative ethical screeners and caps on weightings of individual companies. However, the two companies have some inherent differences in the way the underlying methodologies are applied.

One of the largest differences are the way the positive screeners are applied. As mentioned above, one of the key attributes of VanEck’s ESGI is that companies must meet MSGI’s ESG measures and be considered an “ESG Leader”. The ESG methodology is broad, and as the name suggests includes 3 key pillars, environment, social and governance. A number of factors exist under each of these pillars, which are all weighted and are used to form the ESG score.

By contrast, Betashares’ ETHI includes just a single positive screener, with the positive screener including companies which are 60% more carbon efficient than the average in their industry.

Some of the other differences include Betashares’ ETHI allowing the index provider’s (Nasdaq) investment committee to have greater discretion over the companies to be included in the index. This is a recent change in the index methodology, where the investment committee can now consider 'ESG reputational risk or controversy' when applying their screens. This was seen just recently when Facebook was removed from the index, after their data breach controversy. On the flipside, Vaneck’s ESGI is purely rules based, with the ESG rating (as well as the negative screens) being the key attribute to determine eligibility in the index.

ETHI includes a higher weighting to technology stocks, vs ESGI’s higher weighting to financials. The high tech weighting also leads to a higher weighting to the US, at around 70% compared to ESGI’s 32%. ETHI has around 100 companies in its portfolio and ESGI around 200 companies. The fees are reasonably comparable with ESGI priced slightly lower at 0.55% pa and ETHI 0.59% pa.

A true ethical alternative?

Both ESGI and ETHI have brought greater options to investors who wish to invest with their conscience. By applying different methodologies to their approaches they give investors the option to better target their investments to their own ethical beliefs, with ETHI targeting environmental factors and allowing more manager discretion and ESGI targeting a broader range of ethical considerations and following a stricter rules based approach. There’s no doubt more investors are demanding access to this type of investment and we expect to see options in this space continue to grow.

This post was prepared with publicly available information available from Vaneck and Betashares. ETF Watch did not receive payment for this post, nor endorses the merits of the funds discussed. We recommend investors seek professional advice before investing in this fund.

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