ESG Investing: Investing For Change

Environmental, social, and governance (ESG) investing is gaining mainstream momentum, with investors and institutions increasingly integrating ESG considerations into their financial analysis and the stocks they select.

A 2019 survey by the Morgan Stanley Institute for Sustainable Investing found that interest in sustainable investing among the general population of investors jumped
from 71% in 2015 to 85% in 2019. The trend is even more pronounced among millennial investors. The same study found that 95% of millennials were interested in sustainable investing.

What is ESG investing?

In a nutshell, an ESG investing strategy directs capital to companies that meet strict standards in the realms of environment, social, and governance. The following chart breaks down what goes into each ESG factor:

Corporations are rated by third-party, independent research groups on ESG scales. One of the largest independent providers of ESG ratings is ​​MSCI. MSCI ESG Research collects data from multiple sources including government databases, company disclosures, and over 3,400 media sources to monitor and review companies systematically.  

Source: MSCI Inc

MSCI then rates companies on a ‘AAA to CCC’ scale according to their exposure to ESG risks and how well they manage those risks relative to peers. 

Source: MSCI Inc

One major incentive for investors to embrace ESG investing is financial performance. Studies by S&P Global and ISS Governance suggest a positive correlation between ESG factors and long-term investment performance. Additionally, top-rated ESG companies have consistently outperformed the S&P 500 average in the last five years.

A simple approach to ESG investing

Syfe’s ESG & Clean Energy portfolio is one of five new thematic portfolios and an easy way to get into ESG investing. Pooling 8 world exchange-traded funds (ETFs), it is a ready-made portfolio with high investment potential and an average MSCI ESG Rating of AA (leader). This means that the companies that the ETFs invest in are able to manage ESG issues efficiently and are resilient to disruptions arising from ESG events.

Currently, 51% of the portfolio consists of ETFs that rate highly on all three ESG pillars and have holdings across the US, developed and emerging markets. The other half of the portfolio include ETFs closely aligned to clean energy and water sustainability. Altogether, the portfolio gives investors exposure to heavyweights across different ESG themes without sacrificing diversification or returns.

We deep-dive into some of the ETFs that make up the ESG & Clean Energy portfolio and how they make a positive impact on the world. 

We deep-dive into some of the ETFs that make up the ESG & Clean Energy portfolio and how they make a positive impact on the world. 

Broad ESG Aware Funds  

Constructing the ESG & Clean Energy portfolio starts from curating a universe of more than 100 high quality ETFs. Particularly, in order to keep costs low and maximise take-home returns for investors, ETFs are carefully screened for asset size, expense ratio and liquidity. 

To this end, iShares ESG Aware MSCI EM ETF (ESGE), iShares ESG Aware MSCI EAFE ETF (ESGD) and iShares ESG Aware MSCI USA ETF (ESGU) were selected for the ESG & Clean Energy portfolio.

Each tracks a benchmark index that screens out companies involved in controversial activities and businesses such as tobacco, controversial weapons and firearms. Furthermore, these three ETFs are amongst the most liquid ESG funds according to data from Factset. They also have low expense ratios ranging from 0.15 to 0.25. 

Investors of ESGE, ESGD and ESGU have increased exposure to ESG quality, sustainable impact, and gender equality and are less exposed to headline risk and activities with high carbon footprint. Each of them are also aligned to at least four Sustainable Development Goals based on MSCI ESG Research analysis.

iShares ESG Aware MSCI USA ETF (ESGU)

To give you a better idea of how these ETFs balance a similar risk and return to their relevant broad market with sustainability, we take a closer look at ESGU.

ESGU gives investors exposure to large- and mid-cap US stocks with favourable ESG practices. As of 30 July 2021, the fund has delivered annualised returns of 19.4% over the past three years.

ESGU has a net asset value of over US$20.8 billion, making it the largest fund in the ESG & Clean Energy portfolio. This is unsurprising considering some of its top holdings include renowned names like Apple, Alphabet, Microsoft, Amazon, and Facebook.

For instance, Microsoft has been an ESG leader with ratings remaining unchanged at AAA (leader). This is attributed to its strong performance in Privacy and Data Security and its energy-efficient technologies.

Not forgetting the merits of diversification, ESGU provides broad exposure to sectors like information technology, healthcare, consumer discretionary, financials and communication services. 

iShares Global Clean Energy ETF

iShares Global Clean Energy ETF (ICLN) represents the 30 largest global companies in the clean energy sector and aims to track the performance of the S&P Global Clean Energy Net TR Index. It has an MSCI ESG Rating of A.

ICLN’s top holdings include Vestas Wind Systems, Enphase Energy, and Ørsted. Notably, Ørsted is a European energy company that derives over 75% of its revenue from offshore wind power and plans to generate nearly 100% clean energy by 2025. 

ICLN has had an admirable track record. It delivered an impressive 37.4% annualised return over the past three years, as of 30 July 2021. Additionally, it was the best performer in the World Energy Morningstar category over the past 3 years based on total return, out of 52 funds.

Invesco WilderHill Clean Energy ETF

The Invesco WilderHill Clean Energy ETF (PBW) is another clean energy ETF that focuses more heavily on solar and wind energy. It holds 68 renewable energy companies and includes solar energy companies First Solar, Array Technologies and JinkoSolar amongst its top holdings.

PBW generated 51.1% annualised returns over the last three years, as of 30 July 2021.

Invesco Solar ETF

The Invesco Solar ETF (TAN) is a pure-play solar ETF that holds 55 solar energy stocks. With net assets of US$3.4 billion, it is another popular clean energy ETF that is rated A (leader) on the MSCI ESG Ratings.

Its top holdings include Enphase Energy, SolarEdge, First Solar, Xinyi Solar and Sunrun.

Solar accounted for 58% of all new electricity-generating capacity added in the US in the first quarter of 2021. This figure is poised to grow further. The US government recently enabled instant permissions for rooftop solar installations. This will likely help expedite the adoption of rooftop solar and possibly lower costs for homeowners.

As of 30 July 2021, TAN has generated annualised returns of 56.2% over the last three years.

Invesco Water Resources ETF

With an asset base of more than US$1.8 billion, the Invesco Water Resources ETF (PHO) is the largest water ETF. It invests in companies that conserve and purify water for homes, businesses and industries. At this time of writing, PHO has MSCI ESG Rating of AA (leader).

The case for investing in water is clear. Christopher Muir, an analyst at CFRA Research, notes that water is an essential commodity that is used in everything from drinking to electric-power generation. Moreover, in light of the growing threat of water scarcity, investing in water ETFs can help investors take advantage of a rising market. In fact, PHO has delivered a commendable annualised return of 22% over the last three years (as of 30 July 2021).

Top holdings include Danaher, Waters Corp, Roper Technologies, American Water Works and Ecolab.

Global X Lithium & Battery Tech ETF

The Global X Lithium & Battery Tech ETF (LIT) invests in companies involved in the full lithium cycle, from mining and refining the metal, through battery production.

Experts at Allianz Global Corporate & Speciality observed that electric mobility is a heavily incentivised solution to reducing greenhouse gas emissions. With the rise of electric vehicles (EVs) globally, the demand for the lithium used in their batteries is expected to increase accordingly. LIT captures this growth opportunity perfectly while helping to advance clean technologies. Indeed, the ETF has generated annualised returns of 39.1% over the past three years, as of 30 July 2021.

The ETF is also geographically diversified across countries leading the EV revolution such as China, the US, South Korea, Australia and Japan. One of LIT’s top holdings is Contemporary Amperex Technology Co Ltd (CATL), China’s largest battery maker and supplier to Tesla. According to a Yahoo Finance report, CATL has set its sights on continued expansion, planning to invest a total of US$6 billion in lithium-ion battery production projects across China.

Other top holdings include high-growth companies like Albemarle Corp, Yunnan Energy New Material Co, Eve Energy Co Ltd and BYD Co Ltd.

Incorporate ESG into your portfolio effortlessly

Syfe’s ESG & Clean Energy portfolio allows investors to seek sustainable outcomes while pursuing their financial goals. Beyond ESG filters, the portfolio is optimised to achieve better risk-adjusted returns by selecting cost-efficient ETFs with the lowest tracking errors and decent AUM size. Our allocation strategy is also optimised for volatility to reduce the maximum drawdown of the portfolio. 

Taken together, these factors make the portfolio ideal for beginners who want to get into ESG investing, or seasoned investors looking to add a satellite component to complement their existing portfolio. 

As with all of Syfe’s portfolios, you can start investing with no minimum amount, no lock-in period and no brokerage fees. Plus, we’ll fully manage your portfolio with free dividend reinvestment and automatic rebalancing, for fees as low as 0.35% per annum.