- ESG is a criterion involving parameters such as Environmental, Social and Governance to screen ethical companies.
- By following ESG criterion, an investor has a higher chance to avoid companies whose unethical practices could pose a risk.
- iShares Core MSCI Australia ESG Leaders ETF is a managed fund that aims to provide an ESG-based portfolio.
When it comes to assessing a company, there are numerous criteria. ESG is one such criterion which stands for Environmental, Social, and Governance, and it is a part of a set of standards for a company’s operations that is being used to screen investments by socially conscious investors.
Image Source: Copyright © 2021 Kalkine Media
Environmental criterion tries to gauge how a company performs in harmony with nature. The next one, Social criterion examines how it builds relationships with its stakeholders such as employees, customers, suppliers and other communities where its operations have a direct or indirect impact. The last criterion, Governance deals factors such as a company’s leadership, audits, executive pay, shareholder rights, and internal controls, etc.
Pros and Cons of ESG criterion
Like any other criteria to screen out a company out of the pool of many, ESG too have some advantages that make it a preferred criterion and some drawbacks that limit its use to a few groups of investors.
Since ages, socially responsible investments required a tradeoff from the investor's side. As it limits the universe of companies that are eligible for investment, they also limit the investor's potential profit. And on top of that, quite often Badly reputed companies or a management team sometimes tends to perform very well in terms of its stock price appreciation, at least for short term.
Image Source: © Marianvejcik | Megapixl.com
However, sticking to ECG criterion is essential as environmental, social, and governance criteria also have a practical purpose, apart from just ethical concerns. By following the ESG criterion, an investor has a higher chance to avoid companies whose unethical practices could pose a risk factor, which may become a threat to the shareholders’ investment.
In today’s world, which is full of financial frauds, misrepresentation of facts, insider trading, etc., ESG business practices gain more attention and further investment from large institutions and individual investors. Also, financial services companies such as Wells Fargo, JPMorgan Chase, Goldman Sachs, etc., publish annual reports that extensively cover and review \ESG approaches and activities of the companies.
How to invest in an ESG company in Australia
Screening out a company based on ESG is not an easy task especially for a retail investor. An investor needs to go through numerous financial statements for multiple years to make a judgment of a “clean” company.
However, there is an easy way out in Australia for an investor to avoid all this tidy task and directly jump onboard to invest in these companies. That is through ESG ETFs. An ESG-based ETF is a managed fund, the fund manager of which does the whole job of not just handpicking these high ethics following companies, but also tries to pick the best of the lot. The weightage of every individual company in the portfolio is also decided by the fund manager, along with entry and exit timings.
So which are the best ESG funds in Australia?
There are numerous funds listed on the Australian Securities Exchange (ASX) that allows an investor to invest in the ready-made portfolios of companies based on the ESG selection criterion. A few of these funds are:
- iShares Core MSCI Australia ESG Leaders ETF (ASX:IESG)
The objective of the fund is to provide investors with the performance of the MSCI Australia IMI Custom ESG Leaders Index (before expenses). The fund aims to provide exposure to all the market capitalisations like large-, mid- and small-cap segments of the Australian-listed market, having better sustainability credentials relative to their competitors.
The fund avoids companies which are engaged in suspicious activities that are controversial or have adverse effects on climate. Some of the top holdings of the fund are Commonwealth Bank of Australia (ASX:CBA), CSL Limited (ASX:CSL) and Wesfarmers Limited (ASX:WES).
- SPDR &P/ASX 200 ESG ETF (ASX:E200)
The fund is a sustainable alternative to Australia’s flagship benchmark index – the ASX 200. It is focussed on Australia-listed companies having strong ESG characteristics. At the same time, the fund avoids companies interacting with controversial weapons and tobacco, and companies that uses thermal coal to generate 5% or more of their revenue.
The asset under management of the fund stands at AU$21.36 million and charges a management cost of .13% per annum.
- Russell Australian Responsible Investment ETF (ASX:RARI)
The fund aims to track the Russell Australia ESG High Dividend Index, which incorporates companies that demonstrate positive ESG characteristics. Like other ESG funds, the methodology of the fund lets it stay away from companies that have significant involvement in a range of activities deemed unethical or inconsistent with responsible investment considerations.
The fund invests in ASX-listed shares and trusts with the sole aim of providing its investors with exposure to a responsible investment portfolio, enhanced with ESG-based companies.