Looking under the ESG bonnet

The recently listed VanEck Vectors MSCI International Sustainable Equity ETF (ESGI) sets a high standard on environmental, social, and governance (ESG) ratings. The ETF ranks #1 on ESG ratings from MSCI compared to its ASX ETF international sustainable equities peer group.

ESGI tracks the state-of-the-art MSCI World ex Australia ex Fossil Fuel Select SRI and Low Carbon Capped Index (ESGI Index), which incorporates both values-based and impact investing. An important part of the index design is the utilisation of MSCI’s best-of-breed ESG analysis, which is conducted by a team of over 170 analysts worldwide. 

MSCI assesses 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.  The ESGI Index includes only those companies that rank in the top 15% on ESG performance from each GICS sector. 

ESGI leads with AAA holdings

Research from index provider MSCI shows that ESGI has 87% exposure to ESG leaders (AAA and AA rated companies as determined by MSCI) and no exposure to ESG laggards (B and CCC rated companies).

This is more impressive when you compare ESGI’s holdings to the portfolios of the other two global international ethical or sustainable ETF peers on ASX.  ETF 1 has just 27% exposure to ESG leaders while ETF 2 has 41%. 

The robustness of MSCI's ESG research was reinforced during the recent Facebook/Cambridge Analytica scandal. ESGI did not hold even Facebook before the scandal as it ranks in the bottom quartile of MSCI's Privacy and Data Security Key Issue analysis compared to industry peers with a score of 2.7/10. ESGI, therefore ESGI Index’s transparent rules-based selection criteria meant ESGI successfully avoided Facebook's price crash.    

As the Facebook scandal illustrates having an ethical portfolio with a high ESG score is important as avoiding ESG laggards in portfolios not only has a positive social impact, but also mitigates loss from single stock corrections arising from poor ESG performance.

ESGI tops ESG Quality Scores

Looking further under the bonnet, ESGI also leads its two ETF peers based on their MSCI ESG Quality Scores. The ESG Quality Score measures the ability of underlying holdings to manage key medium- to long-term risks and opportunities arising from ESG factors.

The table below shows the ESG Quality Scores of ESGI compared to its two peers.  ESGI’s MSCI ESG Quality Score is significantly higher than both its peers. ESGI’s score of 8.6 would place it in the top decile of MSCI’s equity global peer group, while a score of 5.9 ranks in the 65^th percentile within MSCI’s equity global peer group.

Sector diversification

By targeting the top 15% ESG-rated companies by market cap in each sector, ESGI maintains diversification across sectors and avoids concentration in any particular sector.

Below we show the sector positions and highlight active positions that ESGI and its peers have compared to the MSCI World ex Australia Index.  The active position is calculated by subtracting the portfolio position from the index position.  In the table the darker the orange the greater the active position from the global benchmark.  The darkest orange represents sectors that vary from the MSCI World ex Australia Index by +/-10%.   This is significant as you do not want your global equity exposure to be a proxy sector bet.

ETF 1 displays a significant exposure to the information technology sector and therefore the risks of that sector.

Country diversification

ESGI is well diversified by country. It is currently significantly underweight the US, but overweight Europe compared to the MSCI World ex Australia Index.

^{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 ('Fund'). 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 Fund, you should read the 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 Fund is 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 the Fund.}  

^{ESGI invests in international markets. An investment in ESGI has specific and heightened risks that are in addition to the typical risks associated with investing in the Australian market. These include currency risks from foreign exchange fluctuations, ASX trading time differences and changes in foreign laws and regulations including taxation.}

^{The Fund is indexed to a MSCI index. The Fund is not sponsored, endorsed, or promoted by MSCI, and MSCI bears no liability with respect to the Fund or the MSCI Index. The PDS contains a more detailed description of the limited relationship MSCI has with VanEck and the Fund.}