A deep dive into ESG themed ETFs

ESG is a bit of a hot topic these days especially with more and more investors after their share of what they feel is more ethical and sustainable investing. With that in mind, it's worth exploring this theme with our data hats on.


Definitions

ESG - In terms of what ESG stands for, it's Environmental, Social and Governance. According to Investopedia :


Environmental criteria may include a company’s energy use, waste, pollution, natural resource conservation, and treatment of animals. The criteria can also be used in evaluating any environmental risks a company might face and how the company is managing those risks. For example, are there issues related to its ownership of contaminated land, its disposal of hazardous waste, its management of toxic emissions, or its compliance with government environmental regulations?


Social criteria look at the company’s business relationships. Does it work with suppliers that hold the same values as it claims to hold? Does the company donate a percentage of its profits to the local community or encourage employees to perform volunteer work there? Do the company’s working conditions show high regard for its employees’ health and safety? Are other stakeholders’ interests taken into account?


With regard to governance, investors may want to know that a company uses accurate and transparent accounting methods and that stockholders are given an opportunity to vote on important issues. They may also want assurances that companies avoid conflicts of interest in their choice of board members, don't use political contributions to obtain unduly favorable treatment and, of course, don't engage in illegal practices.


Link to this is here: https://www.investopedia.com/terms/e/environmental-social-and-governance-esg-criteria.asp


Whilst not in the condition set above, when we look at ESG ETFs in this article we also include those with the "ethical" tagline because whilst the focus with those is on moral and ethical grounds of investing, we feel that they should also be included if investing of this type is being considered.


Current State

Recently, research house Investment Trends was commissioned to do some work for superannuation provider Australian Ethical and were able to provide a good gauge on the state of ESG investing in Australia in 2021 so far. Across the 2,000 respondents they interviewed they had the following findings:


  • 78% of self identified ESG investors plan to invest based on environmental factors (after this it was governance (46%), social issues (34%) and indigenous (31%). 1 year ago it was 58% for environmental.

  • 74% of Gen Z invested in ESG – majority wanting to tackle climate change whilst building wealth

  • Aussie investors were most interested in:

  • Clean and renewable energy

  • Carbon emission reduction

  • Reduced energy usage

  • There has been an Increase in financial planners who offer advice on ESG products to 40 in 2020. It was less than 20 in 2015 and growth looks steady.

  • Familiarity of ESG across investors was higher in investors who receive financial advice:

  • Advised investors: 52%

  • Non-advised: 42%

  • A 3rd of super funds can be considered ESG funds

To access the article you'll need to have an AFR subscription and the link is here:

https://www.afr.com/companies/financial-services/green-investing-demand-jumps-34pc-in-12-months-20210422-p57lf8


Screening

There are 2 types of investment screens being done in this space, positive and negative screening. Positive screening looks for leaders in their space whether its focusing on only 1 or multiple elements of ESG. Negative looks to screen out unwanted types of holdings (e.g. weapons, tobacco, adult entertainment etc). Depending on the type of screening done by the ETF, you will get different types of holdings.


Australian ESG related ETFs

There are 18 ASX listed and 2 Chi-X listed ESG ETFs and these are as follows:

  1. CLNE - VanEck Vectors Global Clean Energy ETF

  2. DBBF - BetaShares Ethical Diversified Balanced ETF

  3. DGGF - BetaShares Ethical Diversified Growth ETF

  4. DZZF - BetaShares Ethical High Growth ETFE200 - SPDR S&P/ASX 200 ESG Fund

  5. E200 - SPDR S&P/ASX 200 ESG Fund

  6. ERTH - BetaShares Climate Change Innovation ETF

  7. ESGI - Vaneck Vectors MSCI International Sustainable Equity ETF

  8. ETHI - BetaShares Global Sustainability Leaders ETF

  9. FAIR - BetaShares Australian Sustainability Leaders ETF

  10. GBND - BetaShares Sustainability leaders Diversified Bond ETF - Currency Hedged

  11. GRNV - VanEck Vectors MSCI Australian Sustainable Equity ETF

  12. HETH - BetaShares Global Sustainability Leaders ETF - Currency Hedged

  13. IMPQ - eInvest Future Impact Small Caps Fund (Managed Fund)

  14. INES - Intelligent Investor Ethical Share Fund (Managed Fund)

  15. MCSE - MFG Core ESG Fund

  16. MSUF - Magellan Sustainable Fund

  17. RARI - Russell Investments Australian Responsible Investment ETF

  18. VEFI - Vanguard Ethically Conscious Global Aggregate Bond Index (Hedged) ETF

  19. VESG - Vanguard Ethically Conscious International Shares Index ETF

  20. VETH - Vanguard Ethically Conscious Australian Shares ETF

Metrics

In this section we take a look at some of the statistics relating to ESG ETFs over the years.


FUM

Funds under management has grown to $3.3 billion as of March 2021 and the pace of growth has certainly accelerated as we can see below. 2020 was a year of leaps and bounds for ESG ETFs as investors continued to pile in.



Net Inflows

Net Inflows for ESG related ETFs had a record year in 2020 and into 2021 with the best months being February 2020 ($218m), November 2020 ($201m) and March 2021 ($186m).

Most inflows are into ETHI and FAIR products with $988m and $843m followed by VESG and RARI (both at $225m).


Performance

Whilst it's not necessarily fair to look at ETFs across asset classes (for example, bond ETFs won't return as much as equity ETFs), at the highest level of categorisation (ESG vs Others), we found that since January 2020, ESG outperformed non-ESG with cumulative total price returns of +11% versus +8%.

Again, it's a broad brushstroke but looking at different asset classes will tell more of a detailed story and we can do that deeper dive in future articles.


Since the total price return data is monthly, we can rely on share price returns data (in this case from Yahoo Finance) to showcase more granularity when it comes to showcasing top ESG performers. We see that INES and IMPQ were the top performers followed by ETHI, VESG and ESGI. This is share price performance only and does not take into account dividend redistributions. Additionally, the figures are baselined to 100.



Holdings

At a high-level, looking at the commonality across holdings we can see that not all ESG related ETFs are the same. In analysis of equity related ETFs that showcase their holdings in detail (e.g. passive ones), what we found was that the most commonly held sector was Financials at nearly 18%. This was followed by Health Care at 15%, Information Technology at 15% and Consumer Discretionary at 11%. The average holding in cash is high at 10%. The figures below come from 15 of the ESG ETFs which have equity sector exposure (including the 3 hybrid ethical ETFs from BetaShares, DBBF, DGGF and DZZF).



The spread across these ETFs is quite different (as can be seen below) where not only are the percentages in each sector different, but some ETFs do not even cover some sectors like energy or have a large amount of holdings in cash and other investments.

This analysis was done as of 26th April 2021 so figures may have changed slightly.


Conclusion

Whatever you end up doing with getting more ESG ETFs into your investing or avoiding it all together, the analysis should be based on what's under the hood in terms of holdings, what the various metrics are telling you (liquidity, net inflows, performance) and how well does this ETF fit in with other assets in your portfolio. Additionally, depending on your style, active or passive ETFs may be the best fit for you. It's well worth doing the research to see which is best for you.


Everyone's goals might be different but what is certainly true, is that ESG investing has continued to see strong growth and is building up a good infrastructure to make sure it's here to stay.







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