Whilst we’re not financial experts we keep a close eye on financial sustainability and the performance of companies that adhere to sustainable practices, standards and policies. We do this so we can understand how the financial markets are impacted by the surge towards sustainable and ethical investing, how businesses are impacted and how businesses can contribute to the United Nations Sustainable Development Goals. This article is a guide that aims to inform on the basics surrounding ETFs, sustainable investing and how these indexes set out criteria that businesses need to meet in order to be a part of them.
It has been estimated that achieving the SDGs will require between US$5 to $7 trillion, with an investment gap in developing countries of about $2.5 trillion. Efforts by governments and philanthropy alone will not be enough. Businesses play a vital role in achieving the United Nations Sustainable Development Goals and ETFs play a vital role in achieving broad investment in businesses that support the SDGs.
What are Exchange Traded Funds (ETFs)?
An ETF is an Exchange Traded Fund which provides investors with a way to invest in a bundle of bonds or shares in one single investment. Unlike other funds an ETF is traded on the stock market meaning that they can be bought or sold at any time during the day. Compared to other investment options, ETFs are low cost meaning a wider pool of investors can invest in an ETF for less than an index fund for example which also tracks a market’s performance. ETFs are also diversified which means they often hold hundreds or even thousands of shares, bonds and commodities which reduces the risk if one particular investment inside the fund under performs.
Why are ETFs important to sustainable development?
As Bloomberg published on 29th January 2020, funds that support positive environmental, social and governance impact (ESGs) are outperforming the market providing investors with a greater return on their investment. “It turns out companies that generate strong business results by helping their customers with energy efficiency, solve some of our biggest sustainability challenges, and companies that are productivity leaders by reducing their resource consumption are performing well,” - Karina Funk, Brown Advisory fund. In 2019 the London Stock Exchange launched the Green Economy Mark which recognises listed companies who derive 50% or more of their revenues from environmental solutions.
How does a sustainability ETF work?
An index is created using specific criteria or screens to select companies that can be a part of the ETF and exclude others. There are different screening criteria depending on who created the ETF and today we’re going to focus on two ETFs that utilise the United Nations Sustainable Development Goals as guidelines for what can be incorporated into the index.
SDGA - Morningstar
The SDGA ETF tracks the Morningstar Societal Development Index. The index has four exclusionary screens and one ‘booster’ to decide what can be included in the index. It was designed to provide exposure to companies worldwide that have strong policies and practices that relate to the United Nations Sustainable Development goals and are actively working in the world’s 47 least developed countries, these are known as LDCs. Let’s focus on the second screen which excludes companies that are not signatories to the UN Global Compact. This means if your business has not joined and committed to implement universal sustainability principles in support of the SDGs your organisation is automatically excluded. If you are not one of the over 9,500 signatories already participating, we can help you through the process and provide guidance on completing your ‘Communication on progress’ report too.
SDG - MSCI
Comprised of positive impact companies that derive the majority of their revenue from products and services that address at least one of the world’s major social and environmental challenges as identified by the United Nations Sustainable Development Goals. This means that companies must not only employ strong, socially conscious practices but also build their business around products and services that drive positive change on an SDG. Companies included in the ETF on the date we published this article included Elon Musk’s Tesla Inc and the Danish wind turbine producer Vestas Wind Systems amongst many other high performing companies over the last few years. Importantly, these companies both represent a high level of market influence, paving the way for large systemic change within their industry sectors.
How can you invest in sustainability?
As an individual there are many emerging finance products from big banks and high growth fintech companies that provide access for a small fee to investing in a range of stocks, bonds and commodities linked to sustainable development. Nutmeg, utilise MSCI’s research to invest in socially responsible investments. As a business you can meet the standards and criterias that the ETFs outline by reviewing their screens, creating strong policies, implementing effective reporting and leading positive impact through your products and services. We can help you to identify where you have potential to grow and where economic prosperity can be achieved whilst developing a sustainable legacy in alignment with the United Nations Sustainable Development Goals.