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Satrix takes the lead in SA’s first ESG ETF launch

17 September 2020 Satrix

Satrix, South Africa’s leading index tracking pioneer, has listed two new ESG ETFs on the Johannesburg Stock Exchange (JSE). This brings their ETF offering to 20 ETFs in their 20th birthday year.

These ESG funds invest in companies which score highly in terms of environmental, social and governance (ESG) factors in their decision-making and daily operations. The two funds are the Satrix MSCI EM ESG Enhanced ETF and the Satrix MSCI World ESG Enhanced ETF.

“We are encouraged by South African investors requesting access to companies that do good in the world and act in the best interest of the planet and its inhabitants,” says Helena Conradie, CEO of Satrix. “As a business with a long-term mindset, and a business that cares about people, bringing two ESG products to the JSE meant we could align our own purpose with that of our clients.”

Sustainability is the umbrella term for "doing good". Investing sustainably protects our planet, respects its people and other species, and guides company boards to do better for everyone.

Satrix and BlackRock bring investors more than index-tracking

Accompanying last week’s ETF launch was a virtual conference focusing on sustainable investing titled “Who cares, wins”. It was co-hosted by Satrix and BlackRock iShares, the world’s largest provider of index-tracking funds, as part of their ongoing IndexMore initiative. This is an educational collaboration between Satrix and BlackRock. The collaboration steps up to provide investors with information on more than just index-tracking. Previous IndexMore conferences covered the topic of “Megatrends”, such as technological break-throughs, climate change and resource scarcity, rapid urbanisation, demographics and social change, and economic power shifts.

Speaking at the conference, Conradie provided some background to the name of last week’s conference. It all started in 2004 when the then secretary-general of the United Nations, Kofi Annan, wrote to more than 50 CEOs of major financial institutions, inviting them to find ways to integrate environmental, social and governance matters into capital markets. A year later the term ESG was coined when Annan’s request led to a report called “Who cares, wins.” What this report made clear was that incorporating ESG into companies makes good business sense and should lead to more sustainable markets.

Also speaking at the conference, Nersan Naidoo, CEO of Sanlam Investments, pointed out that the UN gave businesses a roadmap for the type of world that we want to leave behind to coming generations, when 193 countries signed and adopted the 2030 United Nations (UN) Agenda for Sustainable Development, with the UN estimating that the global gap to implement the 17 sustainable goals ranges from US$3 trillion to a staggering US$5 trillion annually. This is the size of the gap companies need to fill to ensure a sustainable future.

ESG ensures good investment practices

ESG is one of the components of sustainability and specifically focuses on how the areas of environmental, social and governance affect a company’s operational efficiency and future strategic direction. ESG metrics measure how efficiently companies incorporate these principles and have gained popularity in past years. COVID-19 has only seen these practices accelerate.

While ESG measures fall under the umbrella of sustainable investing, they do not pertain to new modes of investing like green or impact investing. Rather, they are measures to calculate how companies are progressing in their environmental efforts, such as mitigating climate risks, managing natural resources scarcity, pollution and waste; social efforts, such as labour issues, product liability, data security and stakeholder opposition; and governance efforts, such as board quality, diversity and effectiveness.

ESG businesses show resilience through economic storms

Incorporating sustainability considerations into your investment research and portfolio construction processes can enhance long-term risk adjusted returns and portfolio resilience. Even before the COVID-19 crisis, governments, businesses and investors were beginning to reassess certain personal and community values. It is possible to measure these values and intentions by incorporating ESG metrics into the investment process. Studies are now starting to reveal that companies that focus on measures like job satisfaction, the strength of customer relations, and the effectiveness of a company’s board exhibit resilience through all market cycles.

Do ESG principles compromise performance?

Thomas Fekete, head of Strategy and Products for Sustainable Investing at BlackRock debunked the myth that ESG means a compromise in investment returns on the “Who cares, Wins” virtual platform. In fact, the opposite is true. When constructing their ESG ETFs, BlackRock evaluates which ESG factors will enhance performance relative to the parent indices. He stated that not all ESG factors are material and although BlackRock has approximately 3 000 data points on each company, they only include factors which affect company performance. This is about one-fifth of the 3 000 data points. Fekete reminded delegates that climate change is a substantial investment risk. If humans continue to use fossil fuels and the population continues to rise at the current rate, we are heading for a world with mounting costs and profound economic damage.

Fekete said that the data received in 2020 is demonstrating the ability of sustainable indices to outperform their parent indices – 81% of sustainable indices have been able to do this during the COVID-19 crisis.

During the conference Naidoo pointed out that ETF issuers like Satrix have a responsibility to create products that align investors’ money with their values, that provide a measurable output of the impact their investments are having, while at the same time making sure investors’ financial goals are achieved. That is precisely what Satrix’s two new ETFs aim to do.

The Satrix ESG funds provide US dollar exposure

As with all Satrix ETFs that accept rands from investors but provide offshore exposure, the new Satrix ETFs feed into existing international ETFs. The Satrix MSCI EM ESG Enhanced ETF feeds into the iShares MSCI EM ESG Enhanced Ucits ETF and the Satrix MSCI World ESG Enhanced ETF feeds into the iShares MSCI World ESG Enhanced Ucits ETF.

South Africans can conveniently invest rands into these two funds while enjoying exposure to a US dollar-based index. Investors need to bear in mind that, as with all offshore investments, they are exposed to exchange rate risk - performance will be positively affected if the rand weakens against the dollar, and negatively affected if the rand strengthens.

Both are total return ETFs, which means all dividends are automatically reinvested.

Access to developed market ESG companies

Investors who require developed market equity exposure, and who have a desire to invest responsibly, will find the Satrix MSCI World ESG Enhanced ETF meets both needs.

The MSCI World ESG Enhanced Focus Index is derived from the MSCI World Index and includes large and mid-cap companies across 23 developed market countries. The index is designed to maximize exposure to positive ESG factors while reducing the carbon equivalent exposure to carbon dioxide and other greenhouse gases as well as their exposure to potential emissions risk of fossil fuel reserves by thirty percent. The index also aims to maintain risk and return characteristics similar to those of its underlying market capitalization weighted index, the MSCI World Index.

The MSCI World ESG Enhanced Focus Index currently holds 1 490 company stocks, in comparison to the 1 601 in the MSCI World Index. The iShares ETF into which the Satrix MSCI World ESG Enhanced ETF feeds holds 1 317 of these. The largest holdings currently are Apple, Microsoft, Amazon, Facebook, Alphabet (Google’s parent company), Nividia, salesforce.com, Johnson & Johnson, and Procter & Gamble. Two-thirds of the fund is exposed to US-listed stocks.

Access to emerging market ESG companies

For investors who want more emerging market equity exposure in their portfolios with strong ESG factors exposure, Satrix launched the Satrix MSCI EM ESG Enhanced ETF.

The MSCI Emerging Markets ESG Enhanced Focus Index slightly down-weights China when comparing it with the index from which it is derived, the MSCI EM Index. It also up-weights the exposure to financial stocks. The top stocks in this ETF currently are Alibaba, Tencent, Taiwan Semiconductor Manufacturing, Samsung, Meituan Dianping, Ping An, Naspers and China Construction Bank. The largest exposure is to China, currently 40% of the index.

Table 1: Comparing Satrix MSCI World ESG Enhanced and Satrix MSCI EM ESG Enhanced ETFs

 

Source: Satrix

Investors can access the Satrix ETFs via SatrixNOW.co.za, which has no minimum invest amount. A standard account and tax-free savings account option are available. The ETFs are also available on various other investment platforms and through personal stockbroking accounts.

 

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