Part 4 - Two Public Equity ETF Impact Investments
Last year my wife Jill and I committed to a personal 100% impact portfolio where we leverage our assets for positive impact by aligning our investments with our vision of how we want the world to be. For us that’s investing in companies that are top performers along environmental, social, and governance metrics and that contribute to the outcomes of the United Nations Sustainable Development Goals.
This is the fourth post in our blog series that documents our journey of transitioning our portfolio from one with majority traditional investments that don’t intentionally create positive impact to one with entirely impact investments. The previous post in this series talked about investing in three public equity impact investments: NEI Environmental Leaders Fund, AGF Global Sustainable Growth Equity Fund, and Meritas SRI International Equity Fund. All three of these investments are actively-managed mutual funds, which means that investors in these funds trust management teams to actively buy and sell holdings in order to increase performance over time. This active approach to investing comes at a cost to investors in the form of management expense ratios, which are the fees paid to invest in the funds. While almost all investments have fees in the form of management expense ratios, actively-managed investments tend to have higher costs to investors than passively-managed ones, which are investments vehicles that tend to limit transactions (buying and selling) to only once or a few times per year. Since passively-managed investments require less active buying and selling, as well as limited overhead expenses in the form of human and physical costs, their management expense ratios tend to be lower than actively-managed investments. Here’s a link to learn more about the differences between active and passive investing.
In an attempt to lower costs associated with our portfolio, we invested in two passively-managed ETFs (exchange-traded funds). ETFs tend to track indexes and carry low fees to investors. We invested in two global public equity ETF impact investments: iShares MSCI Global Impact ETF and Etho Climate Leadership U.S. ETF.
Photo Source: United Nations
The holdings in the iShares MSCI Global Impact ETF earn a majority of their revenue from products and services that contribute to the outcomes of the United Nations Sustainable Development Goals. These holdings are also screened along environmental, social, and governance metrics and tend have a relatively smaller carbon footprint compared to the holdings in traditional benchmarks like the MSCI ACWI Index. The holdings in the iShares MSCI Global Impact ETF are selected based on financial criteria and positive impact performance. Here’s a link to MSCI’s holding selection methodology. While the performance history of this ETF is limited because it launched in 2016, as of the time I’m writing this post (February 2018), financial performance since inception has outstripped the benchmark MSCI ACWI index in that same time period.
Photo Source: Etho Capital
The Etho Climate Leadership U.S. ETF identifies holdings that are the most carbon efficient compared to their industry peers. The thesis is that carbon efficiency leads to higher long-term profitability, an approach to investing that has resulted in financial outperformance compared to a benchmark like the S&P 500 since the inception of the ETF, as of the time I’m writing this post (February 2018). The holdings in this ETF tend to be at least 50% more carbon efficient than their respective industry average and also tend to have the smallest carbon footprint in their respective industries. Holdings are also screened for environmental, social and governance performance. The ETF stays away from specific companies and entire industries identified as bad actors and stewards (tobacco, guns, gambling, etc.). Here’s a little more information about the holding selection criteria.
Before making investments in these two ETFs, 19% of our portfolio was allocated to impact investments. With these two new investments, that figure increases to 41%. We were comfortable allocating a good portion of our portfolio to these ETFs because they have a history of tracking and financially outperforming their benchmarks, while simultaneously intentionally investing for impact.
In terms of asset allocation mix, we essentially used almost all the cash we had on hand to make these two investments. Prior to these new investments, we were underweight in global public equities. With the new investments we’re within the allowable range for global public equities, a little north of our target allocation.
In general, the more passive and low cost approach to public market investing is attractive to our portfolio. We hope that an impact-driven ETF with majority Canadian holdings will be launched in the market in the near future. If you’re working on developing one, please let me know!
Disclaimer: This blog post is not investment advice nor an investment recommendation, so don’t take it as that and don’t rely on it! Seek independent professional investment advice.
