Could these ethical ETFs on the ASX benefit from an ESG push?

ESG investing is alive and well in the market, writes Giselle Roux.

Amongst the countless commentaries and headline noise on virus affected financial conditions, it is surprising that environmental, social and governance (ESG) seems to have gained an even stronger foothold.

The embrace of such standards does, however, run into the consistent problem in the interpretation of ESG. As more data providers enter the field to compete or complement the likes of MSCI or Sustainalytics, the differential score applied to the same companies is causing confusion and risks, undermining the credibility of the process. Fund managers add to that by layering on their own judgement.

The pushback to seeking greater standardisation is based on the loose interpretation of other factors. For example, the definition of a growth stock is hardly uniform. At the most elementary level, the weight attributed to E, S and G respectively, can have a major impact. There are some high-profile cases, such as Tesla, that are iconic examples of a huge divergence in scoring.

Nonetheless, investors with a leaning to ESG will be disappointed to find securities in a portfolio that are counter to their expectations. It is therefore increasingly important to understand what form of ESG is being applied. Is it to avoid risk, or is it to push for change, does it have an ethical flavour and is climate change and sustainability a criterion?

A portfolio that satisfies all investors is impossible. Expectations should be grounded to accept that the result is moving in the right direction rather than at the destination.

For some time environmental factors have held attention with annual reports citing efforts to reduce its impact. These have also been at the heart of some of the highest profile problems in the past decade such as the Volkswagen emissions scandal or the BHP Samarco mine disaster.

The legacy of the virus will add other dimensions.

Social has been a tricky judgement within ESG. Companies have a competitive and profit motive and are not benevolent organisations. Yet the treatment of employees and suppliers has been thrust into the spotlight in the past few months. Problematic decisions of employee pay, retention and health are inevitably a legacy that might well change the ranking score for a company.

Implementation of governance can hit the shareholder pocket hardest on a regular basis. Executive remuneration has been a battleground for some time and those that have been willing to share some of the upcoming profit pain may be treated more sympathetically. Others have dusted segments of their shareholder base via capital raisings while dividend decisions are now fraught with an uncertain investment strategy or pressure on credit ratings.

In addition, there is a whole new layer. How will a bank be treated if it forecloses on a loan where the business or individual has been impacted by COVID-19? What healthcare and leave entitlements are appropriate for employees that may need to self-isolate? What about the potential for a damaging computer security breach by those working off their own devices?

To date, Australian private investors have skewed their ESG judgment to a narrow cohort of sectors such as tobacco, controversial weapons and in many cases, oil companies. Gaming and alcohol stocks are excluded from most not-for-profit funds. The link between governance and bank miss-selling was lightly assessed rather than an abject failure in the ‘G’ of ESG and therefore these stocks mostly retained their position in portfolios. On a global basis, the inherent flaws in most social media platforms have yet to become ESG headlines.

Investors are increasingly sensitive to cleansing their portfolio from what they consider harmful operations. Fund managers and advisors will, therefore, have to spend more time on how ESG is applied rather than rely just on a stated line that proclaims screening as part of an investment process.

On the ASX, the list of ethical ETFs includes:

This article was originally written by Giselle Roux for The Inside Investor

From 200+ ETFs in Australia, our top investment analyst has just identified his #1 ETF for 2021 and beyond.

Low fees? Check.

Long-term growth potential? Check.

Regular cash returns? Check!

This ETF makes investing in ETFs "Super-Easy".

Simply click here or enter your email address below to access the full ETF report, ticker code, and step-by-step investment guide. Our expert's #1 ETF report is completely free.

No gimmicks, no payment, no credit card info. Just enter your email address below and we'll send you the report right away.

From 200+ ETFs in Australia, our top investment analyst has just identified his #1 ETF for 2021 and beyond.

Low fees? Check.

Long-term growth potential? Check.

Regular cash returns? Check!

This ETF makes investing in ETFs "Super-Easy".

Simply click here to access the full ETF report, ticker code, and step-by-step investment guide. Our expert's #1 ETF report is completely free.

No gimmicks, no payment, no credit card info. Just click the link below and enter your email address. We'll send you the report right away.

CLICK HERE TO GET THE REPORT

Unsubscribe anytime. Read our TermsFinancial Services GuidePrivacy Policy. We’ll never sell your email address. Our company is Australian owned.

Information warning: The information on this website is published by The Rask Group Pty Ltd (ABN: 36 622 810 995) is limited to factual information or (at most) general financial advice only. That means, the information and advice does not take into account your objectives, financial situation or needs. It is not specific to you, your needs, goals or objectives. Because of that, you should consider if the advice is appropriate to you and your needs, before acting on the information. If you don’t know what your needs are, you should consult a trusted and licensed financial adviser who can provide you with personal financial product advice. In addition, you should obtain and read the product disclosure statement (PDS) before making a decision to acquire a financial product. Please read our Terms and Conditions and Financial Services Guide before using this website. The Rask Group Pty Ltd is a Corporate Authorised Representative (#1280930) of AFSL #383169.

Keep reading:

General Financial Advice warning
The information on this website is general financial advice only. That means, the advice does not take into account your objectives, financial situation or needs. Because of that, you should consider if the advice is appropriate to you and your needs, before acting on the information. In addition, you should obtain and read the product disclosure statement (PDS) before making a decision to acquire a financial product. If you don’t know what your needs are, you should consult a trusted and licensed financial adviser who can provide you with personal financial product advice. Please read our Terms & Conditions and Financial Services Guide before using this website.

© Rask Australia 2020

Join 20,000+ smart investors

Join the Rask Australia mailing and we’ll send you free investment reports, podcasts, expert insights, investing courses, ASX news and lots, lots more. All free. 

Unsubscribe anytime. Read our TermsFinancial Services GuidePrivacy Policy. We’ll never sell your email address. Our company is Australian-owned.

feedback-icon

What can we do better? Please give us us some feedback :)

We care about your experience, please let us know if you have any suggestions to improve our site.