What do you mean by “it is not integrated with the ESG proces”, these two fund are completly integrated in the ESG process. But that’s right you can find funds which have an higher ESG score like
I can only concur. If you are buying only “socially responsible” stocks from the hand of other investors and disregard the rest of the market what kind of positive effect is expected as a whole? As I see it would artificially bolster the market capitalisation of those “good” companies and lower the value of the others. The only effect I see is that it will create opportunities for rational investors and make the socially responsible investors poorer by buying overpriced stocks. How is that achieving anything positive in the real world?
social group pressure: if such labels become a trend in the finance world you could imagine an effect where non-labelled companies have higher financing costs as no one wants to finance them (higher interest on credit). also it can influence business itself if customers start to require such labels (less revenue due to bad marketing). if it stays limited to who owns the stock then agreed the effect is limited.
I’ve recently stumble upon two different types of socially responsible “funds”, that go beyond thé simple “Green label” that dont changes much.
The Swiss alternative Bank has “stocks”, non traded on exchange, that are used to back up micro loans in Swiss. They say they have around 2% averaged return pa. https://www.bas.ch/?id=556
The second option, which seems more Interesting to me, is the ethos fund. It is basically a finma approved fund that tracks msci world or other index, and that sits on the executive boards of the companies it has sufficient shares in. It then try to up or down votes the decision of the boards that are in conflit with it’s ethic chart. https://www.ethosfund.ch/fr/a-propos-d-ethos/portrait-d-ethos
Have you Heard about them ? I’m still reading about it to see whether it’s honest or not.
Ethos funds are quite expensive. More and more ETFs which are socially responsible are available at low cost. However, there are multiple levels of socially responsible funds and you can get lost easily. I will try to sum up with the MSCI indices:
MSCI World (1654 stocks): standard index
MSCI WORLD ESG UNIVERSAL INDEX (1622 stocks selected out of 1654): The index is designed to reflect the performance of an investment strategy that, by tilting away from free-float market cap weights, seeks to gain exposure to those companies demonstrating both a robust ESG profile as well as apositive trend in improving that profile, using minimal exclusions from the MSCI World Index.
MSCI WORLD ESG SCREENED (1552 stocks selected out of 1654): The index excludes companies from the parent index that are associated with controversial, civilian and nuclear weapons and tobacco, that derive revenues from thermal coal and oil sands extraction and that are not compliant with the
United Nations Global Compact principles.
MSCI WORLD ESG LEADERS (799 stocks selected out of 1654): The MSCI World ESG Leaders Index is a capitalization weighted index that provides exposure to companies with high Environmental, Social and Governance (ESG) performance relative to their sector peers
MSCI WORLD SRI INDEX (390 stocks selected out of 1654): The MSCI World SRI Index includes large and mid-cap stocks across 23 Developed Markets (DM) countries. The index is a capitalization weighted index that provides exposure to companies with outstanding Environmental, Social and Governance (ESG) ratings and excludes companies whose products have negative social or environmental impacts
Similar index: MSCI WORLD SRI 5% ISSUER CAPPED INDEX
I don’t know in which universe you are looking, but I would recommend the following ETFs with high ESG score:
UBS ETF (LU) MSCI World Socially Responsible UCITS ETF (USD) A-dis (unfortunately, this fund is LU based)
The ESG score is strongly dependent on the industry of each country.
Some countries will have automatically better score due to their industry (like Portugal, Netherland). Emerging markets have a lower score, so it would be better to avoid them.
The world Ethos fund is “Ethos - Equities Sustainable World ex CH - E” with a cost of 0.71% including 100 stocks. Is this fund more socially reponsible than UBS ETF (LU) MSCI World Socially Responsible UCITS ETF?. It’s hard to say without an independant comparison. Also Ethos is doing only a comparision on CO2 emision which is only one part of ESG.
As I explain there (“Properties the ETF’s index should have”), I have a hard time making sense of funds that try to compare MSCI ESG ratings across sectors or across geographical regions. I picked the UBS ones in the end.
Interesting read. Its criticism is applicable to the screening part of the process and some other naive approach to SRI investing.
More rational approaches exists.
One I studied on my free time is centered on ESG risks (see my other post). This is the one MSCI takes, at least for some of their indices.
The short version: Investors should invest on the efficiency frontier, meaning they should only be exposed to compensated risk. Typically investors use past volatility as an example of compensated risk. Lack of diversification is an example of an uncompensated risk.
Providers of ESG ratings effectively argue that:
Many ESG risks are uncompensated.
I believe that to be true. If for example the company accountants doctored the books, then the share prices won’t reflect that. Same thing if IT hid a data leak (example: Equifax).
ESG-based ETFs increase the discoverability of ESG risks, meaning companies must compensate investors to maintain their exposure (or more likely, reduce their exposure).
That’s probably somewhat true, through the mandates that most ESG ETFs have as well as the economic incentives for index providers (example: BlackRock engaging with the HK stock exchange for more transparency).
ESG ratings captures enough of the uncompensated ESG risk to make up for increased fees of the corresponding ETFs
That’s the crux of the issue. If it’s true then ESG ratings are a quality factor and will remain so until enough companies have plans to properly manage their ESG risks (at which point ratings will be reflected in price and useless). If it’s false then it’s a cost that’s to put in the balance against increased discoverability of issues. I personally expect that the cost of the ETFs and risks of the methodology roughly cancel the benefits of reduced risk (which means that ETF providers priced it correctly) but preserves the benefit of discoverability for society.
I would be very curious of hearing of other rational approaches to SRI investing.
I find your write-ups and evaluations of ESG investing fascinating, especially the trade-off calculations on fees vs donating to charity.
My thoughts:
At a high level, I understand the objective of ESG investing is to dis-incentivise companies from engaging in unethical or unsustainable practices.
But if you are trying to capture the cost of doing so in this analysis you need to consider the actual effect your ESG investing has on the non-ESG companies. Essentially, considering what is the trade-off in buying one stock (ESG) vs another one (non-ESG).
When you are buying a stock in a company you are buying a share of its future cashflows. Unless you are buying at IPO directly from the company your cash investment goes straight into the pocket of a previous shareholder and does not directly benefit the company.
So what is the indirect added value to the company in having a slightly higher share price? It probably comes down to two key things which your read partly touches on:
Easier/cheaper for the company to raise extra cash (both through equity financing or issuing bonds)
Easier/cheaper to compensate employees/executives (through stock/option issuance)
How you evaluate the value of your investment to the company’s gain from the increase in share price is debatable, but I’d argue that the former is significantly greater.
One could argue that the most significant impact of engaging in ESG investing is that you are directly paying a premium to the non-virtuous (who benefit from your overweighting on ESG stocks), as well as paying a premium to the investment manager filtering according to ESG criteria.
Maybe a better use is to reclaim this premium and donate it through other means. Through donations you can even get the government (and maybe your company) to chip in a slice.
Higher cost of SRI or ESG ETFs could be marginalised, if you are expecting a higher yield compared to “normal” ETFs. Here is an example:
SRI-ETF: TER: 0.3%
investment horizon: 20 years
first payment: 10’000
quarterly payments: 500 annual share price growth: 4.1%
annual dividend: 2% (dividends are accumulated)
yield after 20 years: 56’321
total cost: 2’960
normal ETF
TER: 0.1%
investment horizon: 20 years
first payment: 10’000
quarterly payments: 500 annual share price growth: 4%
annual dividend: 2% (dividends are accumulated)
yield after 20 years: 57’906
total cost: 996
Due to the slightly better annual share price growth, the three times higher TER is almost recovered after 20 years. If you really believe that your SRI-ETF performs better, then the cost can be accepted. I think that SRI/ESG-ETFs are highly overpriced, as has been mentioned before, but I think that the cost will come down, as we have seen with normal ETFs the cost has come down over the years. If the TER is reduced to, for example to 0.15%, in the above example you would even outpace the normal ETF. The question ist, why would SRI/ESG ETFs perform better? Maybe the companies that are avoiding the worst things to people and planet are rewarded at the stock market. Sustainability is a big trend and it could have an impact on our investments.
They also have a global bond fund and a global equity fund, but they are just the classic ESG managed funds, which seems less interesting.
It is a swiss exposure fund that try to vote decision, according to their ethic chart (ethosfund.ch) in boards where they have a voice because the weight of the fund. It is not the most efficient fund, but at least it is proactive in some way. What do you think about it ?
I looked on IB because i thought you could buy SIX funds, but i did not find it. Does someone know where i can buy it ?
Have you considered Effective Altruism? It’s more reasonable - in short, make yourself rich by traditional means and afterwards use that money to support socially responsible organizations.
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