Devil in the details: is your Ethical ETF truly ethical?

Devil in the details: is your Ethical ETF truly ethical?

BY David Bassanese | 14 March 2018
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Although “ethical” investing is clearly on the rise, some investors may be dismayed to find what they thought was an ethically orientated investment fund may still be exposed to industries that many values-based investors would be looking to avoid, such as fossil fuel generation, armaments, gambling, tobacco, junk food and alcohol. In this post I look deeper into ethical investing and delve into BetaShares’ Ethical ETFs, which offer peace of mind through the adoption of some of the most stringent ethical screens in the country.

Ethical investing is on the rise

Australian investment in responsible and ethical investment portfolios has grown at a rapid pace in recent years. At the end of 2016, around $65 billion was being invested within “core responsible investment” managed funds, representing 26% growth over the year.  These funds now account for around 4.5% of total assets under management in Australia, which is up significantly from approximately 1.5% of total industry funds earlier last decade.

Investor preference is a key driver behind the increase in responsible investments. Given the environmental and social pressures facing our planet, many more investors are seeking out investment funds that only invest in companies consistent with their values.  As seen in the chart below, for example, global COlevels are now very high by historic standards.  

                     Global Atmospheric Carbon dioxide (CO2) Concentrations 

Source: NASA

But responsible investing is increasingly not just a matter of conscience – it can make good financial sense in its own right.  Not only is consumer spending shifting toward companies that are considered greener and more socially responsible, technological innovation in the energy sector is also favouring companies less reliant on producing or using fossil fuels.

Indeed, by way of example, the Index of global companies that the BetaShares Global Sustainability Leaders ETF (ASX Code: ETHI) aims to track has, since its inception, outperformed the MSCI World Equity Benchmark.

Some funds are more “ethical” than others…

One challenge for socially minded investors is that there is no generally agreed definition of what constitutes an “ethical” or “responsible” investment fund. Indeed, as noted above, it may surprise some investors to know that some funds that label themselves as ethical may actually include exposure to fossil fuel producers, while others can include companies engaged in a range of other activities such as gambling or tobacco.

To provide investors with a “true to label” investment experience, BetaShares decided at the outset that its suite of ethical funds – the BetaShares Global Sustainability Leaders ETF (ASX Code: ETHI) and the BetaShares Australian Sustainability Leaders ETF (ASX Code: FAIR) –  would be subject to some of the most comprehensive ethical and social governance (ESG) screening methodologies in the industry.

To qualify for either ETHI or FAIR, not only do companies need to meet certain qualifying criteria to be considered leaders in “sustainable” or “climate friendly” activities, they also then can’t be materially associated with a fairly wide range of activities that could be deemed inconsistent with responsible or ethical investing.  These activities include, among others, the production or financing of fossil fuels,  gambling,  junk food, tobacco, pornography, armaments, alcohol and animal cruelty. In the case of our Australian ethical fund, FAIR, an added gender diversity screen insists that companies must also have at least one female board member.

The diagram below outlines the screening methodology underpinning of our global ethical fund  (ASX Code: ETHI).

More specific details on the screening methodology for both funds can be found here.

The upshot of this broad screening methodology is that BetaShares’ suite of ethical ETFs is arguably the most “true-to-label” available on the ASX.

We have researched the holdings of other so-named “ethical” ETFs available on the ASX to the best of our abilities, to check just how ‘true to label’ some of these funds are. As seen in the table below, both FAIR and ETHI exclude companies engaged in a broad range of the usual sensitive activities one might expect, whereas the various criteria used by other Australian and Global “ethical” ETFs means that, depending on the fund, they can and often do include companies engaged in areas such as alcohol, the financing of fossil-fuel producers, coal-fired power plants, the operation of detention centres, animal testing on cosmetics or the operation of gas pipelines.

If in doubt, investors are encouraged to look “under the hood” at what companies their ethical fund actually holds and/or review the fund’s screening methodology within its product disclosure statement.

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