Exchange Traded Funds provide ethically aligned solutions to investors

Tl; Dr

  • Exchange Traded Funds (ETFs) are a type of investment fund that can be traded on a stock market as a single security
  • A number of providers have developed ethical ETFs to take advantage of consumer demand
  • ETFs can be lower cost, and provide transparency on underlying investments for investors

 

Exchange Traded Funds (ETFs) are growing in popularity for individual investors, with the both the funds under management up and the average age of buyers of ETFs falling. Providers are taking advantage of increased demand for ethical ETFs by issuing products geared towards a responsible investment market.

Nicki Ashton, head of strategic partnership and ESG knowledge expert, Russell Investments

An ETF is a type of investment fund that can be bought and sold on the stock market. They’re passive investments that track an asset or market index (for example, the ASX200 Australian share index). On the ASX, there are a few responsible/ethical ETFs, developed by UBS, Russell Investments and BetaShares. Providers that their growing popularity stem from the transparency of the products – you can verify for yourself that the fund maintains its screens by looking at the underlying stocks, plus the relative lower cost of ETFs, which charge lower management fees than actively managed funds.

ETF provider BetaShares recently commissioned research into consumer trends in ETFs and found that the demand on the individual investor side is evenly split between men and women, and that average age of buyers is dropping over time.

The number of ETF investors in Australia grew 18% in the 12 months to September 2017; reaching 314,000, and the research also found that ETF investors are getting younger: the average age of those who started investing in ETFs in the last 12 months is now 42, significantly younger than the average age of 56 among those who started investing in ETFs more than five years ago.

The demographic is younger, getting more mainstream, and one of the big call-outs from the research is interest in ethical investing, which is really fascinating,” says

Alex Vynokur, CEO of BetaShares. “The vast majority – 80% of respondents – said they’d be interested in ethical investments both for Australia and global.”

BetaShares currently has two specific branded ethical ETFS – the Global Sustainability Leaders ETF (ASX: ETHI), which launched in January 2017, and provides access to a portfolio of global companies (ex-Australia) which are similarly ethically-responsible and leaders in sustainability. Since its launch in 2017, ETHI has gathered approximately $170 million in assets making it the largest ethical ETF in Australia. Later in 2017, BetaShares also launched the BetaShares Australian Sustainability Leaders ETF (ASX: FAIR) .

FAIR uses an anti-fossil fuel screen, and also screens out companies that pose significant environmental social and governance risks, including gambling, tobacco, armaments, uranium and nuclear energy, destruction of valuable environments, animal cruelty, chemicals of concern, mandatory detention of asylum seekers, alcohol, junk foods, pornography, human rights and supply chain concerns, and payday lending.

FAIR also introduces a gender diversity screen, requiring a “requisite level” of gender diversity at the board level. FAIR’s methodology also preferences companies classified as “Sustainability Leaders” due to their involvement in sustainable business activities. Such activities include: renewable energy, water efficiency, recycling, waste remediation and re-use of materials, education, healthcare, animal health, healthy foods and nutrition products, and green star rated buildings, amongst others.

“We’ve really seen a very significant rate of growth in the adoption of ethical ETFS in the Australian market,” Alex says. “The response form the market has been overwhelmingly supportive ad positive, and the fact that these two ETFs have well over $200 million in assets under management in such a short period of time is testament to the significant underlying demand for ethical demand in Australian market. … In addition, ETFs are known to be a consumer-friendly investment product-  it’s transparent, it’s low-cost and cost competitive and its’ easy to access. The idea of value for money and low coast – transparency and idea of accessibility and idea of democratising accessibility is interesting. Those are the positive, sustainable values that a lot of the investors who are attracted ot ethical investments are also sharing in.”

Russell Investments has the Russell Investments Australian Responsible Investment (ASX: RARI) ETF. RARI currently has $68 million in assets under management, and is based off of the Russell Australia ESG High Dividend Index. Nicki Ashton, head of strategic partnership and ESG knowledge expert based in Sydney for Russell, highlights the same points of consistency, transparency and lower cost access when speaking of RARI.

“In the ethical space, an index is a quantitative process, but in the ethical space, there’s qualitative info that needs to be considered at the individual company level on environmental, social or governance grounds that may not be priced up in a quant process,” Nicki says. “For RARI, we’ve appointed a responsible investment committee which oversees the processes around RARI to make sure that all of this information is captured. What we’ve done is put together a committee of people who are well regarded in the responsible investment industry to ensure that there’s a level of rigour in application of our ethical screens. It meets twice a year, discusses the existing guidelines around ethical exclusions ,whether it needs to be augmented around issues like fossil fuel, sugar, other socials issues, but the committee is there to make sure that the investments are deemed to be broadly in line with ethical investment. In terms of the guidelines and the exclusions we have within the portfolio, we have the typical ones – tobacco, alcohol gambling , pornography, controversial weapons. There are some fossil fuel exclusions, but those exclusions focus on brown coal and thermal coal mining.”

BetaShares also has a responsible investment committee. BetaShares, Russell and UBS’s ETFs are all rated by the Responsible Investment Association Australasia (RIAA)’s certification program. UBS was not able to arrange an interview with Audacious Investing before press deadline.

“The indices are all reconstituted annually, however, the responsible investment committee which oversees the ongoing governance has, in its mandate, the ability and the requirement to assess any controversies as they arise,” Alex says. “If they arise, there is the ability to take action as soon as it happens, and to remove, for example, a stock from the index. So, there is ongoing vigilance.”

There is strong, broad demand for low cost investment products, particularly around low carbon solutions, Nicki notes.

“Low-carbon is appealing to the retail market,” Nicki says. “There is a range, a spectrum across the whole market in terms of what the preferences are – from deep, deep green to a more measured solution like we’ve done in the low carbon space. Retail are more engaged in this issue – they’re more demanding in the exposures they want. I think that potentially the retail market will see a lot of growth in ethical investment solutions and ethical investment ETFs-  that ease of access, transparency  and those sorts of considerations.”

BetaShares is currently researching developing ethical ETFs that cover other asset classes.

“Fixed income is a clear one that’s next on the cards, and a number of clients are asking for that,” Alex says. “I really believe that over time, the entire asset allocation toolkit is going to be available with ethical investing, and every step is being met with support and enthusiasm and validation. That is a strong rationale to continue.”

The data to develop these solutions is getting stronger and deeper over time, which lends itself to the development of other products, Alex adds.

“It’s not just data, but robust data,” Alex says. “It’s really enabling the ability to construct portfolios that are cost effective and diversified. The idea that you need to have a human to weed through hundreds of pages of annual reports in physical format 20 years ago, to mine out the relevant data – data is making these decisions efficient and scalable, and I think it’s exciting to pass the efficiencies back to the customers. I believe there’s space under the sun for that, no question about that.”