ESG Funds

Introducing ESG funds

Exchange-traded funds allow you to invest in baskets of stocks selected according to very specific features. Some of them for instance focus on “growth stocks”: they only pick companies whose earnings show high prospective growth. Others solely invest in “dividend” stocks instead, uniquely selecting the shares with the highest dividend yields. In this article, we will introduce you to ESG funds: exchange-traded funds that only invest in companies complying with high Environmental, Social, and Governance (ESG) standards. On BUX Zero, you can find as many as five ESG funds to trade.

In simple terms, ESG funds only invest in the most sustainable enterprises. To select them, they rely on the ESG rating of companies, a score that synthesizes their performance in terms of environmental, social and governance sustainability. Such ratings are issued by various independent providers, like Corporate Knights Global 100, Bloomberg ESG Data Service, DowJones Sustainability Index and MSCI ESG Research. Each of them has its own criteria to rate stocks, a revision of which goes beyond our scope here. The ESG funds that you’ll find on BUX Zero all replicate MSCI benchmarks, so the companies they invest in are selected according to the MSCI standards.

The practice of considering sustainability next to economic and financial factors in one’s investment choices goes back at least as far as the 1960s. However, in recent years this trend has accelerated both among institutional and retail investors. Global sustainability problems are becoming more evident by the year, while investors are growing always more aware of the risks these issues bring with them. At the same time, the continuously improving availability of data and analytic tools makes it easier to scrutinize the behaviour of companies and better rank them in ESG terms.

Moreover, we’re witnessing an intergenerational transfer of wealth from baby boomers to millennials which will take another 20 to 30 years to unwind completely. When it comes to choosing their investments, millennials are much more sensitive to sustainability issues than their parents: according to Bank of America’s US Trust, while only 36% of baby boomers see investment decisions as a way to express their social, political or environmental values, among millennials that proportion grows to 67%, almost twice as much.

Finally, as pointed out by BUX’ CEO, Nick Bortot, in this article, Joe Biden’s victory in the US presidential elections is likely to make life harder for less environmentally and socially responsible companies in the United States, while the European Union has pledged to intensify its efforts against climate change through its Recovery plan. This expected shift in paradigm on both sides of the Atlantic is renewing the attention of the media (and investors in turn) towards ESG investing. Therefore, let’s take a close look at the 5 ESG funds you can invest in with BUX Zero.

1. Lyxor Europe Socially Responsible theme ETF
ISIN: LU1940199711

This fund tracks the MSCI Europe ESG Leaders Index, which is made of 201 European companies from 15 developed countries across 11 sectors, all showing high Environmental, Social and Governance performance relative to their competitors. The heaviest constituents include Swiss pharmaceutical giant Roche (4.96% of the index), Dutch semiconductor company ASML (4.18%), British consumer goods multinational Unilever (3.19%) and German software corporation SAP (2.77%).

Listed in February 2019, the Europe Socially Responsible theme ETF is a large fund with around € 874 million under management. It fully replicates its benchmark index by owning all the securities in it and reinvests dividends instead of distributing them. Its total expense ratio (the sum of expenses charged by the fund manager) is around 0.20% a year, to which traditional brokers usually add brokerage commissions. With BUX Zero you can trade the Europe Socially Responsible theme ETF and all other ETFs in this list without paying a brokerage commission on top of the fund’s management expenses. Take a look at the KIID document for further details.

2. UBS USA Socially Responsible theme ETF
ISIN: LU0629460089

This ETF fully replicates the MSCI USA Socially Responsible Index, which includes 124 North American companies scoring higher than their peers in ESG terms. Its biggest constituents are Tesla (6.88%), Microsoft (5%), Disney (4.98%), Procter & Gamble (4.73%) and Nvidia (4.61%).

Founded in 2011, this huge fund manages around $ 1,445 million in assets. As opposed to the previous one, instead of reinvesting dividends, it distributes them to investors twice a year. Another prominent difference is that the UBS USA Socially Responsible theme ETF is subject to currency risk for European investors since its stocks are denominated in dollars and the fund has no currency hedging mechanism. Its total expenses amount to 0.22% a year. Read more on its KIID document.

3. UBS Asia Pacific Socially Responsible theme ETF
ISIN: LU0629460832

This fund is the same age as the previous one, but half the size: it manages around $ 770 million. It was designed to fully replicate the MSCI Pacific SRI 5% Issuer Capped Index, a benchmark including 102 stocks from 5 developed countries in the Pacific region (Japan, Australia, Hong Kong, Singapore, New Zealand), all performing better than competitors in ESG terms. Top constituents include well-known names like Sony (5.29%), Nintendo (4.63%) and Honda (2.95%).

Like the previous one, this fund too distributes dividends every 6 months and is not hedged against currency risk. Management fees will cost you around 0.4% on a yearly basis. Here’s the KIID document.

4. UBS Japan Socially Responsible theme ETF
ISIN: LU1230561679

Quite intuitively, this ETF provides exposure to Japanese companies deemed to be more sustainable than their peers. Founded in 2015, it fully replicates the MSCI Japan SRI Index, which includes 63 large and mid-cap Japanese stocks. Here as well, among the top constituents we find Sony, Nintendo and Honda, but with much heavier weights: respectively 11.13%, 6.32% and 4.03%.

With around $ 480 m in assets under management, the Japan Socially Responsible theme ETF can be considered a medium-sized fund. It distributes dividends twice a year and charges around 0.22% in yearly expenses. You can read more about it here.

5. Lyxor All-World Socially Responsible theme ETF
ISIN: LU1792117779

Last but definitely not least in our review, the Lyxor All-World Socially Responsible theme ETF provides probably the highest degree of diversification among the funds in our list.

By fully replicating the MSCI World Select ESG Rating and Trend Leaders Index, it offers exposure to 779 companies spread across 23 developed countries and 11 sectors, with a high ESG rating and a positive trend of ESG profile improvement. Geographically, while the US accounts for almost 65% of the companies in the index, Japan, Canada, France and Germany are also well represented. Top constituents include Microsoft (6.61%), Alphabet (A and C shares, 4.36% in total), Tesla (2.18%) and Visa (A shares, 1.53%).

Founded in March 2018, this ETF manages around € 228 million. It reinvests dividends and charges around 0.2% a year in total expenses. It is not hedged against currency risk. You can find all other relevant information in its KIID document.

All views, opinions, and analyses in this article should not be read as personal investment advice and individual investors should make their own decisions or seek independent advice. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication.