Article: Investing with a conscience

Socially responsible investing has been put under the spotlight recently after insurance giant AXA (CS:EPA) announced it was ditching its investments in tobacco shares.

The move came shortly after an emissions scandal at Volkswagen (VOW:ETR) – which wiped billions off the company’s shares – and suggestions of poor employee treatment at Sports Direct (SPD).

In light of these events, it’s no surprise that global sustainable investments have nearly doubled in two years to $21 trillion. The exchange-traded fund (ETF) industry has got in on the action, launching equity and bond smart-beta products that track specific socially responsible investment (SRI) indices.

Although companies with an environmental, social and governance (ESG) focus might trail the market in the short-term, evidence suggests they can beat the market on a risk-adjusted basis.

‘Companies’ ESG characteristics can influence how their brand is perceived, delivering a positive outcome akin to advertising,’ says Richard Donegan, managing director at Selftrade. ‘Energy efficiency as a result of social responsibility can reduce costs, and a reputation for social responsibility can attract talented individuals more apt to engage fully with and be proud of their work.’

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London-listed ETFs

You can get exposure to socially responsible investing via seven London-listed UBS ETFs, which track the SRI versions of the MSCI world, USA, European Monetary Union (EMU), Pacific, emerging markets, UK and Japan indices. They exclude businesses involved in alcohol, tobacco, gambling, adult entertainment, civilian firearms, military weapons, nuclear power and genetically modified organisms.

Since inception, six of the seven indices have outperformed their parent indices. MSCI EMU SRI – tracked by UBS ETF MSCI EMU Socially Responsible (EUR) UCITS ETF (UB39) – has gained 9.62% since May 2010 compared with its parent’s return of 7.83%. MSCI Japan SRI – tracked by UBS ETF MSCI Japan Socially Responsible (JPY) UCITS ETF (JPSR) – has gained 0.42% since September 2007 whereas its parent has made a 0.29% loss.

The exception is the MSCI USA SRI index, which has gained 4.19% since September 2007 versus its parent’s 4.53% gain. This is mainly because the USA SRI index excluded Apple (AAPL:NDQ) and Netflix (NFLX:NDQ), whose share prices have rocketed over that time frame.

The socially responsible indices have also produced better risk-adjusted returns, as measured by the industry standard Sharpe Ratio. The UK IMI SRI index has a Sharpe Ratio of 0.64%, much higher than its parent’s ratio of 0.44%.

‘One of the common misconceptions in the past is that SRI funds too often gave a sub-standard performance, but over time this view has been overturned,’ says Allan Lane, managing partner of Twenty20 Investments, a passive investment manager.

Corporate bonds

UBS and iShares also have ETFs which track corporate bond SRI indices. Lane says this means it’s now possible to construct a multi-asset sustainable investment portfolio just using passive investments.

The recently-launched iShares Euro Corporate Bond Sustainability Screened 0-3yr UCITS ETF (SUSE) excludes debt from companies that are involved with controversial weapons, such as cluster bombs, land mines and chemical and biological weapons.