Satrix MSCI World ESG Enhanced Feeder ETF: Investing in Sustainablility

This week's featured ETF is Satrix MSCI World ESG Enhanced Feeder ETF(JSE:STXESG). This ETF is suitable for investors with a high risk appetite seeking exposure to offshore-listed stocks.

To know the investment approach and its portfolio composition, here's the link to the full feature.

Dividend Yield

• N/A

Highlights

• Two main schools of thought that support ESG investing: Risk Management and  Positive Contribution 
• Industries excluded from ESG investing 
• Global sustainable fund flows in Q4-2022 attracted $37bn
• Concerns about tougher regulation and greenwashing 
• Global Outlook 

Sector allocation (top 3)

• Information Technology 20.7%
• Financials 15.9%
• Healthcare 13.4%

There has been a steady increase over the past decade in the demand for investment funds that incorporate environmental, social and governance (ESG) factors, according to JP Morgan Asset Management. 

What’s happening in the markets?   

There are two main schools of thought that support ESG investing. The first entails risk management while the second focuses on the role of investors in deploying capital for a good cause. Investors who choose ESG funds as a risk management vehicle look for companies that can manage multiple risks such as sustainability, regulatory and governance risk. Investors who take the second approach feel a sense of responsibility to make a positive contribution to the wider society.

The Satrix MSCI World ESG Enhanced Feeder ETF focuses on the first method of risk screening. It includes securities of companies with the highest ESG ratings representing 50% of the market capitalisation in each sector of the MSCI ACWI Index. In addition, companies invested in alcohol, gambling, tobacco, nuclear power, civilian firearms, fossil fuels extraction, thermal coal power and weapons are excluded. 

The fund’s investment strategy limits the types and number of investment opportunities available to the fund and, as a result, the ETF may underperform other funds that do not have an ESG focus, thus investors should be wary of missing out on other companies that do not form part of the index.

The worldwide impact investing market is estimated to be $2.5tn, according to Morningstar. The OECD, in its global outlook on financing for sustainable development 2023 report, states that the sustainability financing gap, or the capital amount needed to achieve the UN’s Sustainable Development Goals, increased 56% to $3.9tn in 2020 from pre-Covid 2019. This suggests there is room for growth for ESG funds. The Satrix ETF is one of the cost-efficient ways to gain exposure to ESG flows.

Global sustainable fund flows in Q4-2022 attracted $37bn (about 50% higher than Q3-2022’s $24.5bn) of net new money, according to Morningstar. This was amid rising interest rates, high inflation and recessionary fears.

Morningstar noted that there is disparity on the allocation of funds across different regions. Asia (excluding China) saw net outflows while New Zealand and Australia recorded inflows during Q4-2022.  Furthermore, Morningstar revealed a trend in Japan which showed that newly launched funds tend to attract inflows. Seven out of the top 10 funds that attracted the most inflows were introduced in 2022. 

Europe was the flavour of the quarter, adding $40bn of fund flows, an 80% increase from Q3-2022. Equity funds were the most preferred asset class, accounting for $21.1bn of the new funds. Morningstar expects Europe to continue to dominate sustainable fund flows in 2023.

In contrast to Europe, US sustainable funds had a net outflow of about $6.2bn due to poor returns, impending recession and higher risk, according to Morningstar. In addition, concerns about tougher regulation and greenwashing led investors to limit their exposure to ESG funds in the US. Sustainable fixed income funds were preferred to their non-sustainable counterparts in Q4. 

Broadly, this ETF is designed for investors looking to screen out controversial business areas while maintaining a risk profile similar to traditional benchmarks. Investors should therefore carry out a personal assessment of the fund’s ESG screening prior to investing. This fund tracks the value of the MSCI World.

ESG Enhanced Focus CTB Index in rands, which includes large and mid-cap stocks globally. It has yielded a 9.84% return since inception just over two years ago. The underlying index has yielded an annualised return of 9.35% over 10 years. The fund has a total expense ratio (TER) of 0.34% per annum, which is lower than the Satrix MSCI EM ESG Enhanced Feeder ETF’s TER of 0.39%.

Investment term of the week: Greenwashing

Greenwashing is an exaggerated claim about sustainability. It involves making an unsubstantiated claim to deceive stakeholders and investors into believing that a company’s products are environmentally friendly or have a greater positive environmental impact than they actually do.

Satrix MSCI World ESG Enhanced Feeder ETF(JSE:STXESG)

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Satrix Rafi 40 ETF (JSE:STXRAF) suits investors who want passive exposure to fundamental weighted equities over a long-term investment horizon.

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Background: Exchange-traded funds (ETFs)