Sustainable investors need to be on the front foot

When the Facebook/Cambridge Analytica data scandal broke in March 2018 it was clear that many so-called ESG funds were investing in companies that did not share the same values as their investors. While some scrambled to eliminate Facebook from their portfolio, or justified its inclusion because of its low fossil fuel output, others whose portfolios only target high ESG performers didn’t have it and were not surprised by the revelations. Targeting high ESG performers is one way to identify true-to-label ESG funds.

These are the three factors that clients can look for when assessing their ESG fund:

1. Does the fund target high ESG performers?
2. What is the carbon footprint?
3. Does the portfolio include good corporate citizens and can you tell who they are?

ESG performance

Recently Facebook founder Mark Zuckerberg made headlines when he testified before a US congressional hearing that his company would continue to host paid advertisements that were known to be lies. It was not the first time in the past twelve months Zuckerberg has been called before Congress. Last year Facebook was embroiled in scandal last year after it was revealed that a consulting firm employed by US President Donald Trump, Cambridge Analytica, harvested the data of up to 50 million Facebook users without their permission and without Facebook protecting the data. Despite the controversy, some so called ‘sustainable’ funds and ETFs held Facebook as an investment.

A careful analysis of ESG metrics should have foretold of this data scandal and portfolios which only targeted high ESG performers should have avoided it.

MSCI is a leading global ESG researcher. The company has a team of over 190 analysts worldwide assessing all of the stocks in its global universe on a ‘AAA’ to ‘CCC’ scale according to their exposure to industry specific ESG risks and their ability to manage those risks relative to peers. Well before Facebook’s latest troubles, MSCI had warned that data breaches and regulatory action were potential problems for Facebook.

According to MSCI, Facebook was “exceptionally vulnerable to regulatory actions and user dissatisfaction in case of privacy and data breach. Facebook's controversial data collection and advertising practices have continued to trigger user complaints and regulatory actions.” That was before the Cambridge Analytica scandal.

For that reason, MSCI rated Facebook BBB on its ESG metrics, which isn’t high compared to other tech giants (see the table below). Facebook is a clear laggard in contrast to the A, AA and AAA rated companies. The social network giant should never have been included in any portfolio of ‘sustainable’ companies.

_{Source: Factset, MSCI, VanEck. As at 31 October 2019}

Deep ESG analysis is required in a sustainable equity portfolio so that investors can identify:

• companies that are ESG leaders, that should be considered for investment; and
• companies that are ESG laggards that should be avoided.

Your ESG portfolio should aim to invest in ESG leaders.

Carbon footprint

It is possible to measure the carbon intensity of a portfolio. Carbon intensity measures the efficiency of a portfolio in terms of carbon emissions per dollar of sales. While some ESG products contain exclusions they may fail to exclude companies that own fossil fuel reserves, or emit high levels of carbon. As the table below shows, the difference in carbon intensity between VanEck Vectors MSCI International Sustainable Equity ETF (ESGI), which tracks, the state-of-the-art MSCI World ex Australia ex Fossil Fuel Select SRI and Low Carbon Capped Index, and two other broad sustainable international ETFs.

ESGI’s carbon efficiency is superior.

_{Source: VanEck, MSCI ESG Research LLC 31 October 2019, Competitor ETF}

If you are concerned with your portfolio’s carbon footprint you should invest in a portfolio with a low carbon intensity.

Good corporate citizens and transparency

Transparency and ESG investing should go hand in hand. You should be able to look at the holdings of your ESG portfolio every day and be comfortable that the portfolio holdings are in line with your own values. Among the most common anti-social and irresponsible activities companies can be involved in are:

• alcohol;
• gambling;
• tobacco;
• military weapons;
• civilian firearms; and
• adult entertainment.

If you cannot view the list of your ESG portfolio’s holdings to conduct your own due diligence, then your so-called ESG fund may have something to hide.

The holdings of all VanEck’s ETFs are available on our website, including our ESG focused, VanEck MSCI International Sustainable Equity ETF (ESGI) and the VanEck MSCI Australian Sustainable Equity ETF (GRNV). Further details about index methodologies and revenue screens can be found on the fund pages for ESGI and GRNV, where we also publish a quarterly report which outlines the carbon intensity and ESG exposure of these two ETFs.