The Ethical Investor: The ultimate guide to ESG ETFs, and eInvest’s Jodi Peterson on how to do ESG research
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The Ethical Investor is Stockhead’s weekly look at ESG moves on the ASX. This week’s special guest is eInvest’s Jodi Pettersen.
New year is a time when people like to up their game.
With time to reflect, seek out new ideas and think of the future, Jodi Pettersen of eInvest has shared some of the most helpful resources she has come across that could help investors assess and understand ESG (Environmental, social and governance) related investment information.
We know that everyone defines their personal preferences regarding ESG slightly differently, so we’re here to help you with the old adage: “do your own research”.
“ESG issues are reported in the mainstream financial news such as the AFR frequently, but they don’t usually label them specifically as ESG issues, but rather headlines that impact the share prices of listed companies or the net worth of billionaires,” Pettersen says.
“Headlines talking of the ‘Great Resignation’ may attract clicks, but ESG focused investors might translate this into a focus on employee and customer satisfaction as a signal of a more resilient company to invest in.”
“And specialist financial media like Stockhead are good sources for connecting these dots, but you’re already here so you’re one step ahead of the pack.”
“Equity Mates have several episodes focused on ESG, including our very own regular contributor Emilie O’Neill. For a deep dive purely on ESG related issues, John Treadgold’s Good Future podcast is a rabbit hole worth diving into,” Pettersen said.
“Listed companies themselves report on ESG issues during reporting season,” Pettersen said.
“This information is usually included alongside their financial reports and it increases in importance as more investors value it.”
“Remember, most of this information is historical in nature (backward looking) and greenwashing is a risk.”
For the bigger picture beyond company or even issue-based headlines, there are a number of global institutions dedicated to collectively shaping the role ESG plays in our world,” Petersen says.
“Examples include Global Research Alliance for Sustainable Finance and Investment or Asia Investor Group on Climate Change (AIGCC),” she said.
“Altiorem is a not for profit library of ESG research by institutions and an excellent source where you can search for specific topics.”
“Socially responsible investing and particularly ESG-themed ETFs, have seen a huge rise in popularity over the last couple of years. Record inflows into both active and passive ESG funds were recorded in Australia and globally in 2021.”
“For Aussie investors wanting to do more to support the planet and its people, the choices are increasingly becoming more available.”
“Fund managers like eInvest, specifically those that have ESG focused solutions, should be reporting on the ESG issues related to their portfolios.”
“We like to do monthly videos with our portfolio managers and monthly written updates, but the extent a fund manager reports on ESG issues may be a good indicator of how seriously they take ESG.”
Remember, most ETFs regularly report their holdings to the public and this is a good source for understanding what is under the hood of your ESG ETF.”
Socially responsible investing and particularly ESG-themed ETFs, have seen a huge rise in popularity over the last couple of years. Record inflows into both active and passive ESG funds were recorded in Australia and globally in 2021.
For Aussie investors wanting to do more to support the planet and its people, the choices are increasingly becoming more available.
ESG ETFs listed on the ASX are becoming the go-to investments for those wanting invest in ethical companies, while at the same time diversifying their risk.
Here, we discuss ESG-themed ETFs which investors can trade on the ASX.
Janus Henderson Global Sustainable Equity Active ETF (ASX: FUTR)
In September last year, Janus launched its Global Sustainable Equity Active ETF onto the ASX.
The FUTR ETF invests in companies seeking to confront global challenges posed by so-called “mega trends”, and those seeking to transform their industries in a positive way.
Speaking with Stockhead, Janus Henderson’s head of Australia Matt Gaden said things that fall into this category include climate change, resource constraints, and population growth.
“I think there are different categories of ESG strategies, you’ve got what might be referred to as ‘integrated’ – meaning that a fund considers and integrates ESG considerations into the portfolio,” Gaden told Stockhead.
“This fund FUTR is in the category of sustainably themed investing, so we’re looking at particularly the thoughts of global mega trends that are playing out.”
Investing in a diversified fund like ACDC allows investors to access the potential growth across the EV battery technology megatrend.
ACDC invests in companies involved in the supply chain and production for battery technology and lithium mining, and even includes car makers like Tesla.
The ETF tracks the performance of the Solactive Battery Value-Chain Index, which comprise mainly of companies that are providers of electrochemical storage technology and mining companies that produce metals.
In terms of stocks selection, the fund has some strict criteria.
For example, for energy storage technology stocks, the fund only chooses those that are identified from the Clean Horizon’s Energy Storage Source, classified as electrochemical, and have an energy capacity of at least 1 MWh.
For mining companies, stocks are chosen from Fastmarkets’ Metal Bulletin, including all companies producing battery grade lithium, with their primary listing on an eligible exchange.
ETFS Hydrogen ETF (ASX:HGEN)
Interest in hydrogen – particularly green hydrogen – has taken off in recent months as the world transitions towards renewable energy and various countries strive for “net zero” emissions.
The HGEN ETF tracks the Solactive Global Hydrogen ESG Index, which is a basket of 30 companies in the hydrogen space globally.
ETF Securities’ Kanish Chugh said there was increasing investor interest in the hydrogen space.
“There’s a lot of talk about it at the moment. Australia is well placed in the hydrogen industry to drive some of the growth of that, but that’s where the future needs to be,” Chugh told Stockhead recently.
“When we’re thinking of net zero emissions and how we get there – battery technology is one way and in some respects it will drive us to that goal but hydrogen is another area when you think of industrial capacity – things like feedstock or steelmaking, commercial shipping, planes – that’s where the hydrogen industry can develop and assist in helping us get to net zero emissions.”
“We wanted to get as pure as possible, where the industry is headed [to] green hydrogen. It’s not 100% there yet but is well positioned to being there.”
The ETHI fund aims to track the performance of an index that includes a portfolio of large global stocks identified as “Climate Leaders”, Betashares said.
This would exclude companies with direct or significant exposure to fossil fuels, or engaged in activities deemed inconsistent with responsible investment considerations.
Notable stocks in the portfolio include Apple, Home Depot, and PayPal.
The fund says the the investment process is three-fold.
First, it will select companies in developed markets with a market capitalisation greater than $2 billion.
Second, these companies must have a carbon efficiency (carbon emissions divided by revenue) that places it in the top one-third of companies in its industry.
And finally, the index excludes any climate leader with operations in “sin” industries such as fossil fuels, gambling, alcohol or junk food.
BetaShares Global Sustainability Leaders ETF (currency hedged) (ASX:HETH)
This the currency hedged version of the ETHI ETF.
The HETH ETF currently invests in the BetaShares Global Sustainability Leaders ETF (ASX: ETHI), with the currency exposure hedged back to the Australian dollar.
BetaShares Climate Change Innovation ETF (ASX:ERTH)
The ERTH fund debuted in March last year, and is one of the few ASX ETFs to be focused on the fight against climate change.
BetaShares CEO Alex Vynokur said when announcing the launch that while climate change was a threat, it was also an opportunity that his company’s ASX ETF would seek to capitalise on.
“Our new fund will provide exposure to global companies leading the fight, and likely to benefit from what we believe is a long-term megatrend,” he said.
“This will include not only clean energy but electric vehicles, energy efficiency technologies, sustainable food, water efficiency and pollution control – in short, a broad range of solutions that directly enable the reduction or avoidance of carbon emissions,” Vynokur declared.
“Investors in ERTH can be confident that their investment dollars are having a positive impact, by supporting companies that are leading the fight to create a more sustainable planet.”
The fund seeks to track the Solactive Climate Change and Environmental Opportunities Index
Betashares Global Healthcare ETF (ASX:DRUG)
The healthcare industry is a big part of the ESG segment, based on the very fact that health care provides improved and equal living standards for society as a whole.
Ageing populations and ongoing medical advancements globally are expected to support increasing ongoing demand for healthcare products and services. The pandemic has also shifted investors’ eyes on to the this sector.
The main objective of the DRUG ETF is to track the largest non-Australian global healthcare companies.
And the selling point is that investors’ exposure is hedged back into Australian dollars, which eliminates currency risk for Aussie investors.
More than 70% of its portfolio is invested in US healthcare companies.
VanEck MSCI International Sustainable Equity ETF (ASX:ESGI)
ESGI gives investors exposure to a diversified portfolio of sustainable international companies listed on exchanges in developed markets around the world (excluding Australia).
The fund tracks the MSCI World ex Australia ex Fossil Fuel Select SRI and Low Carbon Capped Index.
The index represents the performance of a set of companies that have high ESG performance and low carbon impact, with focus on screening out fossil fuels, and companies with human rights controversies.
More than a third of its portfolio is invested in US companies.
The fund says there is a four-step decision making process:
First and foremost, investors have to decide what issue matters most to them. A firm that is environmentally friendly may be a laggard on gender equality. And just because the company itself may be ethical, does its suppliers abide by their standards?
Second, study ways to address a company’s goals, both ESG and financial, and third decide on an action. This may not just be buying or selling stock but potentially engaging in shareholder activism.
The final step according to Vanguard is to reassess decisions periodically to determine whether or not a company’s goals are being met.
The VESG ETF tracks the return of the FTSE Developed ex Australia Choice Index.
The index measures the performance of the FTSE Developed ex Australia Index, after excluding companies involved in vice products such as adult entertainment, alcohol, gambling and tobacco.
Other industries the fund avoids include non-renewable energy, and weapons.
The VETH fund seeks to track the return of the FTSE Australia 300 Choice Index.
Similar to VESG, the index excludes companies with significant business activities involving fossil fuels, nuclear power, alcohol, tobacco, gambling, weapons.
Ishares Core MSCI Australia ESG Leaders ETF (ASX:IESG)
Launched in June last year, the IESG ETF is linked to the MSCI Australia IMI Custom ESG Leaders Index, which selects its constituents from the MSCI Australia IMI Index universe of large, mid, and small-cap Australian stocks.
The methodology first screens out companies embroiled in severe ESG-related controversies as well as violators of UN Global Compact principles.
The remaining firms are then assigned an overall company ESG rating based on research from MSCI’s ESG research division.
The rating – one of seven grades from ‘AAA’ to ‘CCC’ – indicates how well the firm manages key ESG issues relative to industry peers. Firms with ratings below BB (lower-average) are not eligible for inclusion.