Ethical investment funds and ETFs to fight climate change

Posted: 11 January 2020 11:04 am
News

Watching it burn. A man stands by helpless as a wild bush fire burns out of control, Lower Eyre Peninsula - South Australia

And if you're worried about cutting profits, the best performing ethical fund returned 37% last year.

As we enter the new year with large parts of the country ablaze and water levels dangerously depleted, the issue of global warming is in the public eye more than ever before.

If the catastrophic Australian bushfires have you questioning where your money is being invested, take a look at these 10 ethical exchange traded funds (ETFs) that exclude companies directly engaged in fossil fuel production and environmental destruction.

Environmentally-conscious ETFs
ASX code Fund name Fees (% p.a) 1-year return Sector
IMPQ eInvest Future Impact Small Caps Fund (Managed Fund) 0.99 n/a Australian small/mid cap shares
FAIR BetaShares Australian Sustainability Leaders ETF 0.49 25.99% Australian shares
GRNV VanEck Vectors MSCI Australian Sustainable Equity ETF 0.35 25.97% Australian shares
INES InvestSMART Ethical Share Fund (Managed Fund) 0.97 n/a Australian shares
RARI Russell Australian Responsible Investment ETF 0.45 22.17% Australian shares
ESGI Vaneck Vectors MSCI International Sustainable Equity ETF 0.55 28.94% Global shares
ETHI BetaShares Global Sustainability Leaders ETF 0.59 36.94% Global shares
VESG Vanguard Ethically Conscious International Shares Index ETF 0.18 30.09% Global shares
GBND BetaShares Sustainability leaders Diversified Bond ETF - Currency Hedged 0.49 n/a Global fixed income
VEFI Vanguard Ethically Conscious Global Aggregate Bond Index (Hedged) ETF 0.26 7.21% Global fixed income
Source: ASX | Period ending: 31 December 2019

ETFs are like any investment fund and they can be traded on the stock market as you would buy and sell shares.

We selected the ETFs in the table based on the list of ethical funds available on the Australian Securities Exchange (ASX) and excluded any that did not prioritise sustainability as part of their criteria. It includes all index funds and listed active managed funds.

How do ethical funds work?

Ethical or ESG (environmental, social and governance) investing is still very new in Australia. Of all 10 environmentally-focused ETFs traded on the ASX, just two funds – GRNV and RARI – are over three years old.

The tricky part about ESG investing is there are no hard rules around which companies should be allowed in or excluded. Most ethical funds screen companies that directly engage in the production of fossil fuels. However, there are around half a dozen on the ASX that ignore these factors.

How much exposure a company should be allowed to have to fossil fuels is also up for debate. Some funds such as FAIR and IMPQ exclude Australia's major banks because they finance the oil and mining sector, but most ethical funds do not.

Below is a description of the strategies taken by each of the sustainability-focused ETFs listed above along with their top stock holdings to help you decide which is right for you, in no particular order.

1. BetaShares Global Sustainability Leaders ETF (ETHI).

Holds global company stocks that it identifies as “climate leaders” based on their low carbon footprint. It excludes companies with significant exposure to the fossil fuel industry and screens for those engaged with gambling, tobacco, weaponry, nuclear energy, animal cruelty, pornography, environmental destruction and human rights concerns.

Top holdings: Apple, Mastercard, Visa, United Health Group, Roche Holding

2. eInvest Future Impact Small Caps Fund Managed Fund (IMPQ)

An actively managed fund that invests in small Australian and New Zealand companies (less than $50 million cap) that are contributing positively to the environment and society, such as renewable energy and health foods. It eliminates those engaged with fossil fuels, alcohol, tobacco, weapons, de-foresting, gambling and unhealthy fast food.

Top holdings: Cash, Kathmandu Holdings (KMD), Integral Diagnostics (IDX), Sims Metal Management (SGM), Meridian Energy (MEZ)

3. BetaShares Australian Sustainability Leaders ETF (FAIR)

A diverse portfolio of Australian companies involved in sustainable business activities. Exclusions include companies exposed to fossil fuels, tobacco, alcohol, junk foods, gambling, weaponry, nuclear energy, animal cruelty, environmental destruction, pornography, recent significant fines or convictions, human rights concerns and lack of gender diversity at the board level.

Top holdings: CSL, Resmed, Suncorp, Telstra, Sonic Healthcare

4. VanEck Vectors MSCI Australian Sustainable Equity ETF (GRNV)

A broad mix of large Australian companies excluding any that own fossil fuel reserves or are engaged in the mining of coal, oil and gas (although it includes mineral miners such as gold). It prioritises those with high environmental, social and corporate governance ratings in line with global research agency MSCI ESG Research.

Top holdings: CSL (CSL), Commonwealth Bank, Transurban Group, Telstra, ANZ

5. InvestSMART Ethical Share Fund Managed Fund (INES)

An actively managed fund that screens companies based on a list of unethical industries including non-renewables such as nuclear, coal and oil, as well as gambling, alcohol, tobacco, pornography, junk food, weapons and payday lending. It primarily invests in Australian companies and cash.

Top holdings: (Must request)

6. Russell Investments Australian Responsible Investment ETF (RARI)

Primarily weighted towards dividend-paying companies that show positive environmental, social and governance (ESG) characteristics. It says it also excludes companies that manufacture or distribute alcohol, tobacco, gambling, weapons and pornography. Companies with direct exposure to fossil fuel production may also be removed. The Fund invests in Australian shares and trusts.

Top holdings: Commonwealth Bank, Westpac, NAB, ANZ, CSL

7. Vaneck Vectors MSCI International Sustainable Equity ETF (ESGI)

A diversified portfolio of sustainable international companies from developed markets, excluding Australia. It excludes companies that own fossil fuel reserves or earn revenue from oil and gas activities.

Top holdings: Microsoft, Home Depot, Salesforce, ASML, Allianze

8. Vanguard Ethically Conscious International Shares Index ETF (VESG)

Holds stocks in some of the world’s biggest companies listed in major developed markets. Stocks are diversified across a range of sectors but it excludes those with significant exposure to fossil fuels, alcohol, gambling, tobacco, weaponry, nuclear power and pornography.

Top holdings: Apple, Microsoft Corp, Alphabet, Amazon, Facebook

9. BetaShares Sustainability leaders Diversified Bond ETF (GBND)

A diversified portfolio of global and Australian bonds, including a significant portion of green bonds which are used to fund environmental projects. Company bonds are screened to avoid the fossil fuel industry.

Top holdings: French Republic Government, Kingdom of Belgium, Netherlands Government, Ireland Government, New South Wales Treasury

10. Vanguard Ethically Conscious Global Aggregate Bond Index ETF (VEFI)

Bonds issued by global governments and investment grade companies. It excludes companies with significant exposure to fossil fuels, tobacco, gambling, alcohol, weapons, nuclear power and pornography.

Top holdings: United States Treasury, Japan, France, Italy, Federal National Mortgage Association

If you would like to show support for those impacted by the fires, you can see our guide on how to donate and help or check out a list of local businesses currently in need of financial support.

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