Using passives fund can be an efficient route into ESG investing, rather than trusting to an active fund manager to make the right calls. With tracker funds you can simply pick the region and strategy on which you want to focus, and get invested at a low price.
As with any investment focusing on environmental, social and governance factors, it's important to do your research to ensure you agree with the stocks the fund is ruling out and those it is allowing into its portfolio. A best-in-class approach, for example, may include sectors you'd prefer to avoid, while very stringent funds may rule out areas you had hoped to gain exposure to.
Here we round up three options for ESG investors looking for ETF inspiration:
For Investing in the UK: UBS MSCI UK IMI SRI ETF
A fund with Rio Tinto (RIO) as its largest holding and BP (BP.) within its top five positions might not scream ESG, but the UBS MSCI UK IMI SRI ETF takes a so-called “best-in-class” approach to investing. This strategy means that entire sectors are not ruled out on ESG grounds but, instead, the top performers within them are selected. So, even though the UK market is heavy on oil and gas companies, this fund has a low carbon risk score.
The index it tracks looks to avoid companies whose products have a negative social or environmental impact. It seeks out UK firms with strong sustainability profiles, and the maximum weighting of any stocks within the fund is 5%.
This makes for a broad portfolio; the index contains 144 stocks. Around 17% of the portfolio is in financial firms, 14.4% in healthcare and 14.2% in consumer staples.
The UK market has undoubtedly had a tough year and the fund is down 14.4% year to date, compared to around 18% for the FTSE All-Share. But, it’s the juicy dividends that are often so appealing in this space and, while many companies have suspended their payouts this year, the fund’s 12-month yield is an attractive 4.44%. Over five years, the fund has delivered annualised returns of 3.17% and the ongoing charge is just 0.28%.
For US Growth: Xtrackers MSCI USA ESG ETF
Launched in 2018, the Xtrackers MSCI USA ESG ETF is a relatively new kid on the block and comes with a low price tag of just 0.15%. The fund tracks the MSCI USA Low Carbon Leaders index, which looks to exclude companies with the highest carbon emissions intensity, focusing on large and mid-sized US companies. This index is a more streamlined version of the MSCI USA index, which has 616 holdings; the Low Carbon version uses additional screening with the aim of at least halving the carbon footprint of its parent index.
Unsurprisingly, the fund has scores particularly highly for Low Carbon and Low Fossil Fuel involvement. The top holdings list is chock-full of the big tech names that have thrived amid the coronavirus pandemic: Microsoft (MSFT), Google-owner Alphabet (GOOGL), and payments giant Visa (V), for example. Indeed, the sector accounts for more than a quarter of the portfolio in total and there is no specific cap on how much of its assets the fund can hold in any one stock; Microsoft, for example, accounts for 13.57% of the portfolio.
Year to date, the fund is up 6.65%, some 3.32 percentage points ahead of its Morningstar Category Average and also ahead of the S&P 500, which is flat for the year so far.
For Emerging Markets Exposure: UBS MSCI Emerging Markets SRI ETF
The emerging markets may not feel like a natural hunting ground for ESG investors but this fund tracks an index looking for companies with outstanding environmental, social and governance ratings. It is generally assumed that companies in the region will have poorer records on human rights, for example, or be more polluting than their developed market counterparts. Of course, with the right screening there are plenty of companies which do in fact meet very high ESG standards.
The MSCI Emerging Markets SRI 5% Issuer Capped Index excludes businesses whose products have negative social or environmental impact, and can find opportunities among large and mid-cap stocks across 26 emerging countries. Again, exposure to any individual stock is capped at 5% to ensure diversification.
The index compromises 189 companies, and the largest country exposures are to Taiwan and China, accounting for 15.5% and 14.7% of assets respectively. They are followed by South Kora (13.4% of assets), South Africa (10.5%) and India (10%). Financials is the biggest sector theme in the portfolio, accounting for almost a third of assets. But the largest holding in the portfolio is actually Meituan-Dianping, a Chinese group buying website for food delivery services and consumer products. Tech is a dominant theme too, with internet group Naspers and computer chip-maker Taiwan Semiconductor (2330) also among the largest holdings. Morningstar awards the fund a coveted five-globe rating.
The fund is down 10% year to date, some 5.7 percentage points behind its category average. Over five years it has delivered annualised returns of 6.68% and the ongoing charge is 0.27%.
