Morningstar - Q3 2021 - 28

Dispatches
a neutral stance and open discouragement by
the Trump administration. There is also greater
skepticism in the U.S. about the correlation
between ESG factors and performance despite a
growing body of research showing that integrating
material ESG factors into an investment process
can lead to lower spreads and better credit
ratings for corporate bonds and better performance
and lower credit risk for sovereigns.
Outside of Europe and the U.S., assets in
sustainable fixed-income funds are also
increasing but from a very low base. As of March
2021, Morningstar identified just 80 such
products, half of which were domiciled in Canada
and Australia.
Hortense Bioy, CFA, is global director of sustainability
research, manager research, with Morningstar U.K.
Benjamin Joseph, CAIA, is a senior manager research
analyst with Morningstar Research Services LLC.
exchange-traded funds after failing environmental,
social, and governance screens.
BetaShares Global Sustainability Leaders ETF
ETHI:AU divested a 6.1% chunk consisting
of Tesla and Netflix in a May rebalancing. At the
same time, VanEck Vectors MSCI International
Sustainable Equity ETF ESGI:AU sold a
5.8% position in Microsoft.
Microsoft was pinged in a regular screening
because of its " carbon emission intensity
score, " says Russel Chesler, head of investments
and capital markets at VanEck. The score
measures emissions relative to market
capitalization; companies that rank in the top
25% are removed.
Similarly, Netflix failed a " climate leadership "
screen, says Louis Crous, chief investment officer
at BetaShares. The test measures emissions
relative to revenue and selects the best third of
firms per industry or those that have actively
avoided emissions elsewhere.
Tesla, Netflix, and
Microsoft Fail Some
Funds' ESG Screens
AUSTRALIA + NEW ZEALAND
Australia
Global giants Tesla TSLA, Microsoft MSFT, and
Netflix NFLX have been removed from two of
Australia's largest sustainable international equity
Meanwhile, Tesla fell afoul of BetaShares'
controversy screens. Among the issues, the
electric vehicle maker reopened a U.S. production
facility contrary to government COVID directives
and faces scrutiny over the environmental impact
of a German production facility and possible
forced labor issues in its supply chain. Tesla was
cut after refusing to publicly respond to the
matters or engage with BetaShares' responsible
investment committee.
It's worth noting that Australia's second-largest
sustainable international equity fund, Vanguard
Ethically Conscious International Shares ETF
VESG:AU, continues to hold Microsoft, Netflix, and
Tesla. A Vanguard spokesperson said the
three companies had not failed any of the negative
screens applied by the index.
The differences stem from the ESG screens used
by the indexes that these passive ETFs track.
Negative screens exclude companies based on
involvement in specific activities, such as gambling.
Positive screens prioritize companies that meet
criteria on issues such as carbon emissions.
Negative screens are less likely to lead to portfolio
changes because companies would need to
move into excluded areas or become involved
in serious controversies to be cut. Positive screens
create more latitude. The everyday behavior of
companies can change their ESG scores
or emissions levels. Many positive screens are also
comparative, so falling behind industry peers
could lead a company to be cut.
The Vanguard ETF tracks an index constructed
using only negative screens, while BetaShares and
VanEck use benchmarks that use positive
screens as well as negative. All three indexes
eschew companies involved in weapons,
nonrenewable energy, and vice. The BetaShares
offering also excludes companies involved
in animal testing, detention centers, and factory
farming, while the VanEck ETF screens out
those doing business in certain foods.
The last two funds then use positive screens
to narrow the list. BetaShares emphasizes
" climate leadership " through relative emissions
reduction, with final inclusion decisions made by a
three-person responsible investment committee
These Sustainable ETFs Have Some Key Differences
Company
BetaShares Global Sustainability Leaders ETF ETHI:AU
Morningstar
Sustainability Rating
Morningstar
Rating
VanEck Vectors MSCI International Sustainable Equity ETF ESGI:AU ;;;;; QQQ
Vanguard Ethically Conscious International Shares ETF VESG:AU ;;;
Analyst Rating
-
% Assets
in Top 10
;;;;; QQQQQ ´ 31.51
30.56
- -
Source: Morningstar Direct. Sustainability rating as of 04/30/2021. Portfolio data as of 05/31/2021 for ETHI and ESGI and as of 01/31/2021 for VESG.
20.68
Technology
%
27.29
4.18
24.82
Healthcare
%
16.88
22.40
14.36
Fin Svcs
%
26.26
27.06
15.36
28
Morningstar Q3 2021

https://www.morningstar.com/etfs/xasx/vesg/quote https://www.morningstar.com/etfs/xasx/vesg/quote https://www.morningstar.com/etfs/xasx/ethi/quote https://www.morningstar.com/etfs/xasx/ethi/quote https://www.morningstar.com/authors/2110/benjamin-joseph https://www.morningstar.com/stocks/xnas/msft/quote https://www.morningstar.com/stocks/xnas/tsla/quote https://www.morningstar.com/stocks/xnas/nflx/quote

Morningstar - Q3 2021

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