Sunday, 12 July 2020

iShares MSCI World SRI Fund


It's been almost two years since I decided to bring my investments more into line with my values and lifestyle. Part of this process has been to divest my portfolio away from fossil fuel companies such as Exxon and Shell and also the big banks which finance their planet-destroying activities. This has inevitable involved the sale of my multi-asset global index funds such as Vanguard Lifestrategy. I looked around for an alternative in the ESG range of funds but all seemed to hold these fossil fuel companies.

Earlier this year I made the case against investing in the traditional index tracker.

"Obviously, the starting point for any responsible investor is to avoid the sectors which are the most polluting - coal, oil and gas. However, this is currently almost impossible to achieve by adopting the passive approach, even using the so called ESG funds, they all seem to hold the big oil companies and the big banks which fund their continuing operations for exploration and drilling".

I was therefore pleased a few months later when a reader flagged up this global index fund from iShares in a comment to a recent article and I decided to take a closer look.

This fund was first launched in 2017 but in November 2019 it adopted a new benchmark by moving from the MSCI World SRI Select to the new SRI Select Reduced Fossil Fuel Index (RFF)

RFF Index

This index has just 372 holdings compared to 1,600 for the traditional global index fund. The index (link to pdf) has been created for those investors looking for a socially responsible investment benchmark made up of companies showing strong sustainability qualities whilst avoiding  a range of sectors which are unethical and including fossil fuels. It therefore screens out companies involved in weapons, tobacco, alcohol, gambling, nuclear power, adult entertainment and GMO.

In the past these responsible funds with a focus on ESG - ethical, social and governance - tended to all include the big oil companies but would generally hold a reduced weighting to the standard global index. However this index specifically excludes companies with exposure to fossil fuels.

The companies that make it through are then assigned an ESG rating which indicates a companies ability to deal with ESG risks relative to others in the same sector and excludes those which are below average.

This is the first fund I have seen which specifically excludes these fossil fuel companies - oil & gas, thermal coal, power generation oil sands extraction.


The index has returned an average of 9.2% p.a. over the past 5 years to end June 2020 compared to 7.5% for the World Index. This is not really so surprising given the poor performance of the energy sector in recent years.

Here's a short extract from MSCI  on their principles of sustainable investing:

"This rapidly changing world also presents investment opportunities on an unprecedented scale. Development of alternative energy sources could lead to transformative new products that cut our dependence on fossil fuels. Advances in technology could help resolve food and water shortages and enable us to grow sustainably within the limits of the planet’s resources. The next phase of the information revolution could lead to quantum improvements in productivity and connectivity in a manner that could enrich the lives of the socially and economically marginalized.

We believe that this convergence of factors (climate change, social attitudes, institutional governance, technological innovation) will significantly impact the pricing of financial assets and the risk and return of investments and lead to a large-scale re-allocation of capital over the next decades. Investors who treat these factors as a fad and continue to operate in a wait-and-see mode could find themselves unprepared for the dramatic repricing of assets that could result".

The Covid-19 pandemic has shown how quickly unsustainable sectors can become exposed to a sudden shock to the system. For example, the drop in the price of oil has seen the share price of Exxon plummet and the value of this once-dominant oil major has now been overtaken by Tesla. BP is not far from being overtaken by offshore wind specialist Orsted. This is a real changing of the guard as we transition from fossil fuels to cleaner forms of energy such as solar and wind.

I was interested in this recent article reporting that Wood Mackenzie, a global energy consultant has estimated that $1.6 trillion has been wiped from the oil & gas sector this year so far with more to come. BP last month cut the value of its assets by $17.5bn and forecast the value of oil will be lower for decades whilst Shell announced a $22bn writedown in the value of its assets and cut its dividend by two thirds. It's not hard to conclude that the whole sector is in crisis and that a fundamental shift is taking place as the world starts to take climate change more seriously.


I'm not sure why anyone would want to continue investing in a carbon-intensive sector where $billions worth of projects, financed by governments and the big banks, are at serious risk of becoming worthless - so called stranded assets.

All investors, large and small, have a choice over where to invest. Many are divesting away from fossil fuels realising that the smart money is increasingly moving into sectors which offer sustainable and long-term solutions to the climate emergency and away from those companies and sectors which continue to be part of the problem.

I believe we have a window of opportunity to make a difference - maybe 5 or 10 years before the risks posed by the climate crisis become irreversible. I believe we can all make a difference and the small diy investor can now choose to continue with the traditional index or move to a cleaner index provided by these new fossil-free funds. This fund will now be placed on my watchlist and likely added to my green portfolio in the near future.

If you have any thoughts or opinions on investing in the oil & gas sector, climate change issues and passive index funds, feel free to share them in the comments below.

8 comments:

  1. Interesting as ever. That one's going on to my watchlist.
    I like you have been communicating with Vanguard to initiate an index fund along similar lines. And just this morning i've discivered that an ESG Developed World index fund is now available:
    https://www.vanguardinvestor.co.uk/investments/vanguard-esg-developed-world-all-cap-equity-index-fund-gbp-acc?intcmpgn=equityglobal_esgdevelopedworldallcapequityindexfund_fund_link
    It looks like it's pretty much the same as their conventional world index fund minus big oil.
    Any thoughts?
    Thanks as ever
    Bernie

    ReplyDelete
    Replies
    1. Thanks Bernie,

      Yes, I noticed the new offering from Vanguard last month. As yet there is no information on holdings but I hope it will exclude all fossil fuel companies.

      I have been following the voting record of Vanguard in relation to climate resolutions since the Guardian article last year and I am disappointed in their reluctance to vote against the big oil majors on environmental disclosure and related matters so as an organisation I am still avoiding them. I suspect (but do not know) that many of their top executives will have a seat at the boardrooms of the oil companies and will therefore have a vested interest in maintaining business as usual.

      If anyone can confirm one way or the other I would be interested but for the time being, on a personal level, I will avoid Vanguard...but obviously pleased they have at long last introduced something a little more climate-friendly.

      Delete
    2. For those interested, here are a couple of links regarding Vanguard and climate...

      https://www.theguardian.com/environment/2020/jan/13/vanguard-refuses-to-sign-up-to-climate-crisis-commitment

      https://www.theguardian.com/environment/2019/oct/12/top-three-asset-managers-fossil-fuel-investments

      Delete
  2. And this article from last month suggests that whilst the new ESG index fund doesn't contain big oil or 'vice' companies, Vanguard itself still seems to be dragging its heels compared with rivals lik Blackrock;
    https://portfolio-adviser.com/vanguard-lags-rivals-after-dragging-its-feet-on-esg/

    ReplyDelete
    Replies
    1. Thanks for the link which confirms my feeling...

      “Vanguard has been dragging its feet in the ESG space and is slowly waking up to the reality that more is expected of an asset manager of its size and influence,” says Morningstar director for sustainability research Hortense Bioy.

      “While recognising the importance of the topic, Vanguard appears to continue to struggle to adopt a view on ESG and seems reluctant to acquire adequate resources.”

      Delete
  3. Thank you for this post DIY Investor. I'm most grateful. I have been monitoring this fund since the turn of the year. I hadn't invested in it during my rebalances and top-ups so far. Partly because I wanted to understand and see how it works and partly because of the covid-market volatility. Though I feel comfortable enough that on my next rebalance I'll be investing into it rather than say VWRL.

    I had been looking for sometime for a fund that both did not invest in carbon nor in "ethically challenged" companies. I was uncomfortable investing in the former as that usually meant big investments into companies like Facebook. The later meant hefty weighting into oil stocks. This fund seems to find a good balance between being sufficiently diversified but being a genuine SRI/ESG fund.

    Thanks again. L.

    ReplyDelete
    Replies
    1. Thanks L and yes, I think this fund provides a good balance for the climate-aware investor.

      I guess the next step for the industry would be a climate-friendly all-in-one mixed asset fund which provided a range of equity weightings. Maybe next year...

      Delete
  4. According to morningstar carbon metrics it's in a similar ballpark to other sri/esg indexes from vanguard, UBS, vaneck, amundi etc, roughly 40% lower exposure than a global index
    https://www.morningstar.co.uk/uk/etf/snapshot/snapshot.aspx?id=0P0001BT2E&tab=6
    Seems still have to go active to get much lower

    ReplyDelete