Pinpointing your Positive ESG Impact
ETFs inspired by the UN SDGs enable investors to focus on their preferred ESG themes, though research into the underlying holdings is still recommended.
Some ESG ETFs own hundreds, or even thousands of stocks, based on statistical ranking, rating and scoring systems that can leave investors struggling to identify a clear ESG theme or purpose for the investment strategy.
The 17 United Nations Sustainable Development Goals (SDGs) can provide one framework for defining the guiding stars of an investment - and measuring progress towards those goals.
Some “all singing, all dancing” ESG ETFs could target all 17 of the SDGs, usually based on an index designed to do the same. For instance, XTRACKERS MSCI GLOBAL SDGS UCITS ETF (XDGI.S) is based on the MSCI ACWI IMI SDG Impact Select Index.
Other ETFs will home in on just one of the 17 SDGs.
The XTRACKERS GL SDG 3 GOOD HEALTH ETF (XDG3.S) is based on the MSCI ACWI IMI SDG 3 Good Health and Well-being Select Index, which takes a two-pronged approach to the impact goal. On the positive side, it identifies companies that provide Major Disease Treatment, Sanitation, Contraceptives, Conventional Pollution Control Solutions and Low Toxicity/VOC Solutions. Meanwhile, all of the MSCI SDG range also exclude companies deemed to be acting contrary to any of the 17 SDGs.
The XTRACKERS GL 6 CLN WATER&SANITAT ETF (XDG6.S is based on the MSCI ACWI IMI SDG 6 Clean Water and Sanitation Select Index, which has quite a broad spread of sectors: industrials, consumer staples, materials, utilities, real estate, IT and healthcare. Whereas some sector ETFs are US-dominated, this one also has a broad geographic reach with Japan, Sweden, Canada and Norway alongside the US. Top ten holdings include Japanese toilet maker, Toto, and Norwegian salmon farmer, Salmar. As such this ETF could offer investors exposure to stocks they would not easily find in a more standardised sector ETF.
A TER of 0.35% is reasonable value for Xtrackers’ sector specific ETFs, compared with some others costing two or three times as much.
Bernie’s View
SDG themed ETFs per se are not completely new. iShares also runs ETFs using the MSCI SDG indices, with slightly higher TER of 0.49%.
From a positive impact perspective, the devil is in the detail of how the SDGs are mapped onto specific companies, which can be contentious. Different index providers will select different companies to pursue the SDG goal. Morningstar has just announced the launch of its own range of SDG indices, which will likely spawn associated ETFs at some stage. Impact investors may want to lift up the bonnet and do their own deep dive analysis of the underlying stocks to ensure that the portfolio is aligned with their own ethical views.
From an investment perspective, some of these ETFs can look rather close to a sector ETF. Around 95% of the good health ETF above is in healthcare stocks, and most of that is in the US. It could be useful if this product was benchmarked against a sector index rather than the broad MSCI World index. The MSCI index focused on SDG 3 outperformed global equities in years such as 2018 and 2022, because healthcare is a defensive sector, and not because is branded as targeting the SDGs.
Of course, some ESG investors would rather avoid a passive index tracker altogether, and insist that an active approach, which includes ongoing engagement with companies, is really needed to pursue positive impact goals. Newday did launch an active SDG ETF last year, using a very catchy ticker SDGS, but it is being liquidated due to not raising enough assets. Perhaps some ESG investors with a taste for active strategies are not yet aware that ETFs can also be actively managed?