Sustainable investors need to be on the front foot
  • Vector Insights

    Sustainable investors need to be on the front foot

    Arian Neiron, Managing Director and Head of Asia Pacific
    22 November 2019
     

    When the Facebook/Cambridge Analytica data scandal broke in March 2018 it was clear that many so-called ESG funds were investing in companies that did not share the same values as their investors. While some scrambled to eliminate Facebook from their portfolio, or justified its inclusion because of its low fossil fuel output, others whose portfolios only target high ESG performers didn’t have it and were not surprised by the revelations. Targeting high ESG performers is one way to identify true-to-label ESG funds.

    These are the three factors that clients can look for when assessing their ESG fund:

    1. Does the fund target high ESG performers?
    2. What is the carbon footprint?
    3. Does the portfolio include good corporate citizens and can you tell who they are?

    ESG performance

    Recently Facebook founder Mark Zuckerberg made headlines when he testified before a US congressional hearing that his company would continue to host paid advertisements that were known to be lies. It was not the first time in the past twelve months Zuckerberg has been called before Congress. Last year Facebook was embroiled in scandal last year after it was revealed that a consulting firm employed by US President Donald Trump, Cambridge Analytica, harvested the data of up to 50 million Facebook users without their permission and without Facebook protecting the data. Despite the controversy, some so called ‘sustainable’ funds and ETFs held Facebook as an investment.

    A careful analysis of ESG metrics should have foretold of this data scandal and portfolios which only targeted high ESG performers should have avoided it.

    MSCI is a leading global ESG researcher. The company has a team of over 190 analysts worldwide assessing all of the stocks in its global universe on a ‘AAA’ to ‘CCC’ scale according to their exposure to industry specific ESG risks and their ability to manage those risks relative to peers. Well before Facebook’s latest troubles, MSCI had warned that data breaches and regulatory action were potential problems for Facebook.

    According to MSCI, Facebook was “exceptionally vulnerable to regulatory actions and user dissatisfaction in case of privacy and data breach. Facebook's controversial data collection and advertising practices have continued to trigger user complaints and regulatory actions.” That was before the Cambridge Analytica scandal.

    For that reason, MSCI rated Facebook BBB on its ESG metrics, which isn’t high compared to other tech giants (see the table below). Facebook is a clear laggard in contrast to the A, AA and AAA rated companies. The social network giant should never have been included in any portfolio of ‘sustainable’ companies.

    Company

    Market Capitalisation (US$bn)

    MSCI ESG Rating

    Apple

    1,186.80

    A

    Microsoft

    1,146.90

    AAA

    Alphabet

    915.6

    AA

    Amazon

    868.9

    BB

    Facebook

    563.1

    BBB

    Intel

    253.4

    A

    Source: Factset, MSCI, VanEck. As at 31 October 2019

    Deep ESG analysis is required in a sustainable equity portfolio so that investors can identify:

    • companies that are ESG leaders, that should be considered for investment; and
    • companies that are ESG laggards that should be avoided.

    Your ESG portfolio should aim to invest in ESG leaders.

    Carbon footprint

    It is possible to measure the carbon intensity of a portfolio. Carbon intensity measures the efficiency of a portfolio in terms of carbon emissions per dollar of sales. While some ESG products contain exclusions they may fail to exclude companies that own fossil fuel reserves, or emit high levels of carbon. As the table below shows, the difference in carbon intensity between VanEck Vectors MSCI International Sustainable Equity ETF (ESGI), which tracks, the state-of-the-art MSCI World ex Australia ex Fossil Fuel Select SRI and Low Carbon Capped Index, and two other broad sustainable international ETFs.

    ESGI’s carbon efficiency is superior.

    ETF
    Carbon Intensity
    (tons CO2e/US$m sales)
    Weighted Average Carbon Intensity
    (Sum of portfolio weight x each stocks carbon intensity)
    ESGI
    23.8
    24.0
    ETF 1
    189.7
    174.3
    ETF 2
    174.1
    83.8

    Source: VanEck, MSCI ESG Research LLC 31 October 2019, Competitor ETF

    If you are concerned with your portfolio’s carbon footprint you should invest in a portfolio with a low carbon intensity.

    Good corporate citizens and transparency

    Transparency and ESG investing should go hand in hand. You should be able to look at the holdings of your ESG portfolio every day and be comfortable that the portfolio holdings are in line with your own values. Among the most common anti-social and irresponsible activities companies can be involved in are:

    • alcohol;
    • gambling;
    • tobacco;
    • military weapons;
    • civilian firearms; and
    • adult entertainment.

    If you cannot view the list of your ESG portfolio’s holdings to conduct your own due diligence, then your so-called ESG fund may have something to hide.

    The holdings of all VanEck’s ETFs are available on our website, including our ESG focused, VanEck Vectors MSCI International Sustainable Equity ETF (ESGI) and the VanEck Vectors MSCI Australian Sustainable Equity ETF (GRNV).

    In addition, we also make available a quarterly report to investors which outlines the carbon intensity and ESG exposure of these two portfolios:

    ESGI

    GRNV

    Please contact us if you would like to learn more.

     

    IMPORTANT NOTICE:
    This information is issued by VanEck Investments Limited ABN 22 146 596 116 AFSL 416755 ('VanEck') as responsible entity and issuer of the VanEck Vectors MSCI International Sustainable Equity ETF and the VanEck Vectors MSCI International Sustainable Equity ETF ('the Funds'). This is general information only and not financial advice. It does not take into account any person's individual objectives, financial situation or needs. Before making an investment decision in relation to the Funds, you should read the relevant PDS and with the assistance of a financial adviser consider if it is appropriate for your circumstances. The PDS is available at www.vaneck.com.au or by calling 1300 68 38 37. The Funds are subject to investment risk, including possible loss of capital invested. Past performance is not a reliable indicator of future performance. No member of the VanEck group of companies gives any guarantee or assurance as to the repayment of capital, the payment of income, the performance, or any particular rate of return from a Fund.   The Funds are indexed to a MSCI index. The Funds are not sponsored, endorsed, or promoted by MSCI, and MSCI bears no liability with respect to the Funds or the MSCI Index. The PDS contains a more detailed description of the limited relationship MSCI has with VanEck and the Funds.