PA ANALYSIS: Is it time to consider sustainable ETFs?

Added 21st July 2016

Passive investing has made a rapid rise over the past couple of years. When it comes to sustainable investing, however, index-based funds are still relative newcomers.

PA ANALYSIS: Is it time to consider sustainable ETFs?

Market leader iShares only launched its first series of SRI equity ETFs for European clients this year. The iShares Sustainable MSCI Emerging Markets SRI UCITS ETF and its equivalents for Japan and the US exclude controversial sectors such as alcohol and tobacco producers, gambling operators and weapons producers, but not oil and gas companies. On top of that, MSCI screens the remaining companies on their ESG credentials, with the lowest scoring companies being excluded. This process results in approximately three quarters of the original index being eliminated.

A sustainable bargain

AXA IM also recently launched a global ‘smart beta’ equity ESG fund, based on a similar methodology. Interestingly, at 0.33% the costs of this fund are the same as for its non-ESG equivalent. Moreover, the new iShares ETFs are even cheaper than their plain vanilla counterparts. The EM SRI ETF has a TER of 0.35%, compared to 0.68% for the plain version of the product.

So SRI-themed ETFs shouldn’t be dismissed as the latest way for asset managers to justify a higher price for a ‘fancy’ product, though these prices are introductory costs which could of course rise over time. And, as you can see in the graph below, the MSCI SRI indices for EM and European equities outperform their plain vanilla equivalents.

But are they worth considering for fund selectors who have hitherto concentrated on actively managed SRI funds, which have their own, distinct merits?   

“We started looking into passive sustainable equity solutions last year,” says Rishma Moennasing, an equity fund analyst at Rabobank in the Netherlands. “We only offer two options to our clients now, but the range of available products is growing rapidly so we’re looking to expand our offer.”

“All trackers use some form of screening, but in order to get a proper idea about how sustainable a company really is, you have to dig deeper” - Louie French

But according to Louie French, a fund analyst at wealth manager Tilney Bestinvest, ESG investing is in many ways too complicated for trackers to work. “All trackers use some form of screening, but in order to get a proper idea about how sustainable a company really is, you have to dig deeper,” he says. Pharmaceutical company Johnson & Johnson is an example of a company that is found in many SRI indices, but whose ESG credentials are questionable, he adds. “One might think that testing on animals [as done by Johnson & Johnson] is unethical, but SRI ETFs don’t screen for something like this.”

Therefore, French prefers leaving the decision whether to include a stock or not up to a fund manager. “They should know exactly how ethical or unethical a company is based on the in-depth screening they conduct.”

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Vincent McEntegart, manager of the Kames Diversified Monthly Income Fund, explains how he aims to deliver a stable and sustainable income of 5% p.a.*, paid monthly, by investing in a range of asset classes

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About Author

Tjibbe Hoekstra

Senior Reporter

Tjibbe joined Expert Investor as a senior reporter in March 2014. Before moving to London he worked as a financial news reporter for various news outlets in Amsterdam, including Reuters and ANP, the main news agency in the Netherlands. He also worked for Fondsnieuws, a website and magazine for finance professionals in the Netherlands. Tjibbe holds a MSc in Public Administration and a post-graduate diploma in Journalism.



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