10 green ETFs top $575m FUM
A growing sustainability focus among Australian exchange-traded funds has seen the ESG segment's funds under management jump 80 per cent year-on-year, Morningstar research shows.
A growing sustainability focus among Australian exchange-traded funds has seen the ESG segment's funds under management jump 80 per cent year-on-year, Morningstar research shows.
Australian retail investors now have access to 10 ESG-focused exchange-traded products (ETPs) from four providers: BetaShares, Russell Investments, UBS, and VanEck Vectors. All are equity products with exposure in Australia and off-shore.
While UBS was an early mover in the space, having launched six sustainability-focused ETFs in 2015, BetaShares claims the highest proportion of total FUM. Collectively, the latter manages $269 million across its BetaShares Global Sustainability Leaders ETF (ETHI) and BetaShares Australian Sustainability Leaders ETF (FAIR).
The rating process
Morningstar Sustainability Ratings were rolled out across the global Morningstar group from July 2016, using a methodology created in partnership with ESG ratings specialist Sustainalytics.
This uses a data-driven process to rank investment funds according to their performance against environmental, social and governance (ESG) criteria.
Socially responsible investing has traditionally involved screening out specific companies or sectors from investment portfolios. For instance, by avoiding investing in companies involved in gaming, tobacco, fossil fuels or carbon-intensive industries. But over the last few years, much of the investment industry has moved on from divestment as a strategy.
Australian-listed ETPs employ a combination of rules-based and quantitative processes, using either a negative or positive screening process, according to Morningstar manager research analyst, Anshula Venkataraman.
"Negative screens, for example, may down-weight or exclude sectors such as tobacco or petroleum, or avoid stocks that rank poorly on an ESG basis within their sector. Positive screens, however, favour companies that fare well on an ESG basis," Venkataraman says.
The products
BetaShares, Russell, and VanEck use a combination of these screens in their products, while UBS purely employs negative screens.
The BetaShares Global Sustainability Leaders is "a US-heavy portfolio tilted to technology, healthcare, and cyclical names," says Venkataraman. While it is regarded as expensive relative to some of its peers, the ETF still compares favourably to many actively-managed strategies with a sustainability focus.
Another BetaShares product in the space, the BetaShares Australian Sustainability Leaders ETF tracks the Nasdaq Future Australian Sustainability Leaders Index. Among other attributes, these companies must derive more than 20 per cent of their revenue from investments that positively contribute to society.
These business focuses include renewable energy, recycling, healthcare, and sustainable forestry, and also meet other ESG-related criteria. It also excludes companies involved in gambling, tobacco, and alcohol.
The Russell Investments Australian Responsible Investment ETF (RARI) follows a similar process in excluding various industries, but also "favours stocks with consistent and relatively attractive dividends," Venkataraman says.
VanEck's MSCI International Sustainable Equity ETF (ESGI) doesn't yet have an assigned sustainability rating. It tracks a portfolio of more than 200 holdings, and is "reasonably diversified across regions and sectors, with the heaviest weightings in the US and financials," according to Venkataraman.
The six offerings from UBS each apply the same ethical portfolio process across a different region. While the approach is the same, the regional skews result in quite distinct portfolios.
As an example, Venkataraman says one of them has 70 stocks, with a bias to financial services and materials; another holds 1,500 names with financials, technology, and healthcare sector weightings.
The latest edition of Morningstar's ETFInvestor - available to Premium subscribers - provides a snapshot of our detailed research on each of the 10 sustainability-focused ETPs in the Australian market.
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Glenn Freeman is senior editor, Morningstar Australia.
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