If you put your money where your values are, what happens the value of your money?

In July 2019, the first ESG ETF in Europe [1]  surpassed €1 billion AUM (assets under management). That was a big deal.

It is the UBS ETF MSCI World Socially Responsible UCITS ETF with a ticker code of “WSRUSA” and it trades in Swiss Francs.

Perhaps you’re wondering what ESG stands for (and why it matters)? ESG is an acronym for “environmental, social and governance”. An ESG ETF is a passive fund[2]  that invests its money in companies that seek to have a positive impact on the environment (or at least not overly negative), makes a contribution to society and is run with good governance standards. In essence, it’s a mechanism where you can put your money to work from a return point of view and as a way for you to use your resources to do good in the world.

While this sounds good, we’re going to investigate if it really is and what the dangers are later in the piece.

However, let me bring you back to why it’s a big deal that the ETF I mentioned above is listed in Europe in general.

According to a recent interview with Deborah Fuhr[3], founder of ETFGI (whose publications I always quote when speaking or training on this theme), there is $5.3 trillion dollars in ETFs globally and 70% of this is domiciled in the U.S. and a paltry 16% are domiciled in Europe. Nothing surprising there, eh? However, when it comes to the money invested in ESG ETFs, 52% of the money is in Europe. In other words, this is a very big investing trend where Europe is leading the way and the US is gathering momentum. This claim is further evidenced by the recent Financial Times headline “Europe leads the $31tn charge on sustainable investing[4] ” and by the graph below highlighted in that piece. Further, Blackrock, at the time of writing, has 28 funds with this theme listed in Europe[5].

 



Assets in ESG Funds Surge

Assets in ESG Funds Surge

 

So, while all of that is remarkably interesting, I still have three questions that must cut through the mustard.

Do these sustainably themed ETFs generate comparatively good returns with market-focused ETFs?
Is there sufficient liquidity through these ETFs that won’t penalise an investor through the bid/ask spread?
How does an index provider decide on what ESG is versus not?

Can I make a decent return with an ESG ETF?

I asked this question years ago on the blog and saw a clear delineation at that time between what made money and what didn’t.[SH6]  The question is as relevant today as it was back then.

I looked at the year to date return of the aforementioned WSRUSA and see that it has had an 18.67% return[7]  year to date and in comparison to the Euro Stoxx at 11.62%[8]  and the S&P 500 return of 18.05%.[SH9]

While one ETF doesn’t speak for the entire theme, it’s difficult to write definitively about the returns generically. Therefore, I took a selection of broad ETFs, put them into a watchlist using the VectorVest programme[10]  and compared them against their geographical benchmarks since the beginning of the year.

The results since the beginning of the year are higher than the market benchmark in both Europe and the US:

 

Source: VectorVest Europe

 

Source: VectorVest US

 

The specific ETFs that I chose (randomly) were:

iShares MSCI Europe SRI UCITS ETF[SH11]

BNP Paribas Easy Low Carbon 100 Europe – EUR[SH12]

iShares [SH13] MSCI KLD 400 Social ETF

iShares ESG MSCI EAFE ETF[SH14]

TAN – Invesco Solar ETF[SH15]

Therefore, in these cases, these ETFs were either outperforming or keeping pace with the market return. Now, of course, if I had tested different timeframes with the same or different ETFs, I would have got different results. I encourage you to try out different data points to evaluate these for yourself. You can use something free and simple (e.g. Yahoo Finance) or a paid and more value-adding offering (e.g. VectorVest has a Backtester tool that enables you to combine an approach of any level of simplicity or complexity with market timing indicators).

So far, I’m satisfied that I can find an ESG ETF that could compete with a market-orientated ETF.

 

Are ESG ETFs liquid?

The answer to this question can be found by examining the bid/ask spreads of these stocks and they are a function of the average daily volume of the stock itself.

I checked the volume of both watchlists and I found a significant amount all round for most.



Source: VectorVest Europe

Source: VectorVest Europe

Source: VectorVest Europe

 



Source: VectorVest US

Source: VectorVest US

Source: VectorVest US

 

(VectorVest doesn’t feature stocks trading in CHF and so I sought the bid/ask spread of WSRUSA manually).



Source: Teletrader Public Web Station

Source: Teletrader Public Web Station

Source: Teletrader Public Web Station

 

Therefore, I was satisfied with the answer to my second question, based on the research of my small sample group.

 

What metrics decide between good ESG and not?

The answer to this truly defines whether this is an investment theme or just a fashionable thing to do. As one might expect, if money is pouring into sustainable funds (and $31 trillion is an attention-grabbing figure), then lots of funds with questionable sustainable characteristics may try to brand themselves accordingly. There have been reports of “greenwashing” (i.e. talking up environmentally sound practises that have little substance behind them) and jaw-dropping disparities between ESG standards in recent times. One could understand why many could look cynically at how truly ESG the investment world can be.

So, how can we answer this question? On this occasion, I didn’t find any faster route than going into the individual ETF site and obtain each individual Impact Report (e.g. this one for KLD[SH16] )

Therefore, before you put your money where your values lie, put your investment ideas through these three tests and then let your money work for you and work for the world.

Positive Economist

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Source: The Positive Economist