Three steps to finding an ESG fund
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    Three steps to finding an ESG fund

    Arian Neiron, CEO & Managing Director - Asia Pacific
    27 August 2021

    More and more fund managers are offering funds with terms like ‘sustainable’, ‘ESG’ and ‘responsible’ in their name. However, there is more to an investment than its title. Sometimes the emperor is wearing no clothes and investors need to be able to look beyond the label to determine how ‘green’ their investment is.

    Investors can follow the steps in this simple checklist.

    There are three critical things investors can do to assess their ESG funds:

    1 – Determine if your fund goes beyond simple exclusions.
    2 – Measure your fund’s credentials using a free fund comparison tool.
    3 – Assess your fund’s transparency.

    By following these three simple steps, you are well on your way to avoiding ‘greenwashing’.

    What is ‘green washing’?

    Back in the 1980s, environmental concerns gained more attention as global warming became a greater focus. This was amplified by environmental concerns such as the deterioration of the o-zone layer and disasters such as the Exxon Valdez oil spill in Alaska that was, at the time, the worst human-caused environmental disaster on record.

    In response, many companies started to promote their commitment to the environment. Oil company Chevron, for example, launched its award winning “People Do” advertising campaign which showcased Chevron protecting wildlife. Unknown to the public, many of the environmental programs that Chevron promoted in its campaign were mandated by law. While running the ads, Chevron was found guilty of spilling oil into wildlife refuges.


    Greenwashing became the phrase that describes such ads. The phrase encapsulated the environmental corporate messaging that promoted one thing, while the company did another.

    The term greenwashing is coming to the fore again. Now it is being applied in the world of investing. There are many funds that claim to be environmentally conscious, but the label does not match the reality.

    You will be able to avoid greenwashing by follow these simple steps:

    1 – Determine if your investment goes beyond simple exclusions

    There are two ways your fund can incorporate environmental factors in portfolios. The first involves ‘negative screens’ by excluding those investments in companies involved in such business activities as fossil fuels or nuclear energy.

    These screens are quantitative. It is relatively easy to identify whether a company is involved in these activities from publically available data such as annual reports. Companies owning or deriving income from these sources can be excluded from a portfolio. There are many portfolios that only exclude companies because of such activities.

    ESG investing has to go further than just negative screens.

    A second approach considering environmental factors as a part of a thorough ESG evaluation, goes beyond quantitative data and includes qualitative analysis.

    Many active fund managers incorporate this type of ESG scrutiny into their risk analysis. However, the challenge for many investors has been combining the inclusion of environmental leaders in their portfolio by identifying those companies that demonstrate a commitment to the environment. This can be done by targeting the ESG leaders in each industry.

    It is also possible to target climate change leaders by identifying those companies that are the lowest carbon emitters.  

    Many managed investments do only one or two of these. It has been particularly hard for passive managers, who track indices, to include effective qualitative environmental research.

    Enter MSCI, one of the world’s largest index providers. MSCI is also one of the world’s leading ESG research providers. MSCI has a team of over 200 analysts worldwide assessing all of the stocks in its global index 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.

     

    Companies in the ESGI Index are selected from the MSCI World ex Australia Index through a four-step screening process based on:

    1. Fossil fuels exclusion
      All companies that own any fossil fuel reserves or derive revenue from mining thermal coal or from oil and gas related activities are excluded.

    2. Socially Responsible Investing (SRI) exclusion
      Those companies whose businesses are involved in the following activities or exposed to them are excluded from the Index: alcohol, gambling, tobacco, military weapons, civilian firearms, nuclear power, adult entertainment, genetically modified organisms (GMOs), soft drinks, nutrition and health.

    3. High rating ESG inclusion
      MSCI ESG Research data is then used to include only the leading ESG performers in each GICS sector.

    4. High carbon emitters excluded
      Remaining companies are then ranked by their carbon emission intensity. The top 25% by number are excluded from the ESGI Index.


    As an index provider, MSCI is also able to assess and retain data on each company’s fossil fuel reserves and CO2 impact as well as its business activities.

    VanEck collaborated with MSCI to create a state-of-the-art index that combines all of MSCI’s ESG research and data to create the MSCI World ex Australia ex Fossil Fuel Select SRI and Low Carbon Capped Index (ESGI Index). See the side box for a full index description.

    The result is the most comprehensive, in depth, dark green index in MSCI’s ESG family. The VanEck MSCI International Sustainable Equity ETF (ASX: ESGI) tracks the ESGI Index. For Australian equity investors we also offer the VanEck MSCI Australian Sustainable Equity ETF (ASX: GRNV)*.

    ESGI and GRNV, for example, go beyond simple exclusions, so satisfy the first question. You should be comfortable that your so-called ESG fund does the same.

    2 – Measure your fund’s credentials using a free fund comparison tool.

    You need to be able to assess the environmental impact of so-called ESG funds. You should not just take our word for it, just as you should not accept the word of every other fund manager with an “ESG” labelled fund. You need to check yourself. It is easy, and it is free.

    Investors are now able to assess the environmental, social and governance metrics for all funds. MSCI has a fund comparison tool that can be found here - ESG fund ratings.

    MSCI’s tool aggregates all of the holdings in a fund to give the fund an overall ESG rating. It also includes data on the weighted average carbon sales and ‘green’ vs ‘brown’ revenue. Now investors can verify for themselves if their fund manager is truly green or if they are just ‘greenwashing.’

    3 – Assess your fund’s transparency

    Now you need to determine your funds transparency, beyond reporting all the holdings, which should be a minimum.

    Your ESG fund should be transparent in regards to its CO2 emissions of its portfolio and its corporate impact including a summary of stocks that have been added or removed.

    These should be readily available:

    If your ESG manager is not providing this, you need to ask why.

    In addition to this level of transparency, you should be able to access your fund manager’s:

    • proxy voting record to determine if they are practicing what they preach; and its
    • stewardship report to ensure that your fund manager is engaging the management of companies they invest to be better corporate citizens.

    We have these policies and reports available at the bottom of our Responsible Investing page – click here. They are also available here – click here.

    If, once you have followed the three steps above about your ESG fund, and you are comfortable with the answers you get, you may have found an investment appropriate to your values and ethics.

    You now have a robust framework to assess any ESG fund and this will help you avoid ‘greenwashing’.


    * Click here for more information on the index GRNV tracks, the MSCI Australia IMI Select SRI Screened Index

    VanEck Investments Limited ACN 146 596 116 AFSL 416755 (‘VanEck’) is the responsible entity and issuer of units in the VanEck MSCI International Sustainable Equity ETF (ESGI) and the VanEck MSCI Australian Sustainable Equity ETF (GRNV). This is general advice only, not personal financial advice. It does not take into account any person’s individual objectives, financial situation or needs. Read the PDS and speak with a financial adviser to determine if the fund is appropriate for your circumstances. The PDS is available here.

    An investment in ESGI carries risks associated with: financial markets generally, individual company management, industry sectors, ASX trading time differences, foreign currency, country or sector concentration, political, regulatory and tax risks, fund operations and tracking an index. See the PDS for details.

    An investment in GRNV carries risks associated with: financial markets generally, individual company management, industry sectors, fund operations and tracking an index. See the PDS for details.

    No member of the VanEck group of companies guarantees the repayment of capital, the payment of income, performance, or any particular rate of return from any fund.

    ESGI and GRNV are indexed to a MSCI index. The funds are not sponsored, endorsed or promoted by MSCI, and MSCI bears no liability with respect to ESGI, GRNV or the MSCI Index. The PDSs contain a more detailed description of the limited relationship MSCI has with VanEck and the funds.

    © 2021 Van Eck Associates Corporation. All rights reserved.