ETFs

Two ETFs with strong ESG convictions to keep on radar

Tue 28 Jun 22, 5:25pm (AEST)
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Key Points

  • Companies that improve their ESG characteristics tend to outperform
  • Research by Platypus Funds Management points to an Alpha - an excess return compared to a benchmark index - within the data
  • Investors more than doubled the amount of capital deployed to global ESG funds last year

While the ethical investing sector may experience a short-term slowdown in fund flows - while investors' seek safer havens during the market downturn - historically, environmental, social and governance (ESG) investments had fended off market periods when fear rules.

Thanks to institutional and retail investor demand, Matt Patsky, Boston-based CEO of Perpetual-owned Trillium Asset Management doubts the inflation-fuelled correction on global share markets will derail the global investor enthusiasm towards ethical investing.

Unlike other investment styles, Patsky reminded the market that in each of the downturns in the past, ESG funds have not witnessed significant withdrawals.

An unstoppable force

Based on Morningstar’s research, investors have more than doubled the amount of capital deployed to global ESG funds last year.

Despite growing investor cynicism for ‘greenwashing’ – where companies and funds overhype their green credentials - Brian Cahill, global head of ESG at Moody’s Investors Service, regards ESG-themed investing as an “unstoppable force”, given the level of investor demand. 

A source of outperformance

Beyond the feel-good factor, research by US-based fund manager Axiom Investors, which manages the Pengana Axiom International Ethical Funds in Australia, suggests companies that improve their ESG characteristics, tend to outperform.

Then there's research by Platypus Funds Management which points to an Alpha - an excess return compared to a benchmark index - within the data.

Interestingly, companies assessed as low carbon risk by Sustainalytics, also reveals strong outperformance, a higher price-to-book value than the S&P/ASX 200, and a higher price-to-earnings ratio.

With the market trading well off its highs, now’s a good time to search for an attractive entry point into ETFs with strong ESG convictions.

Here are two ETFs to keep on radar

Vanguard Ethically Conscious International Shares Index ETF (ASX:VESG): 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, non-renewable energy, and weapons.

  • Net Asset value: $64.08

  • Management fee: 0.18%

  • ETF Assets under management: $622m

  • Number of holdings: 1703

  • Equity yield (dividend): 1.7%

  • Distributions: Quarterly: 64.027 cps

  • Top 2 countries: US (70.2%), Japan 7.4%

  • Top 2 companies: Apple and Microsoft

The ETF share price is down -8% over 12 months but has rallied 5% along with the broader market over the last week to $64.22.

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Vanguard Ethically Conscious International Shares Index ETF share price over 12 months.

BetaShares Global Sustainability Leaders (ASX: ETHI): Aims to track the performance of an index (before fees and expenses) comprising large global stocks identified as Climate Leaders, excluding companies with direct or significant exposure to fossil fuels or engaged in activities deemed inconsistent with responsible investment considerations.

  • Net Asset value: $10.84

  • Management fee: 0.49%

  • ETF Assets under management: $1.9bn

  • Number of companies: 200

  • 12-month distribution yield: 6.1%

  • Distributions: Semi-annual

  • Top 2 countries: US (70.2%), Japan (7.4%)

  • Top 2 companies: Apple (5.4%) and Microsoft (4.8%)

The EFT is down – 12.73% over the last 12 months but rallied 7% along with the broader market over the last week to $10.90.

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BetaShares Global Sustainability Leaders ETF share price over 12 months.

 

Written By

Mark Story

Editor

Mark is an investigative financial journalist and editor who started his career working for Marathon Oil in London. He has a degree in politics/economics and a diploma in journalism. Mark has worked on 70-plus newspapers and financial publications across Australia, NZ, the US, and Asia including: The Australian Financial Review, Money Magazine, Australian Property Investor and Finance Asia. Mark is passionate about improving the financial literacy of all Australians through the highest quality content. Email Mark at [email protected].

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