Passive investing gets socially responsible

If you’re looking for a globally diversified, low-cost passive investment, why not be socially responsible at the same time and help save the planet?

socially responsible investingOld Mutual recently launched two new unit trust funds which should find traction among younger investors who are becoming increasingly concerned about environmental and social issues. The so-called ‘millennial’ investor is not only more socially aware than previous generations but is also buying into passive investing, questioning the value offered by more expensive actively managed funds.

The Old Mutual funds offer investors the option to track either the MSCI World ESG (Environmental, social and governance) Index or the MSCI Emerging Market ESG Leaders Index, providing exposure to global, socially responsible companies at an annual service fee of 0.45%.

Historically, investing for social responsibility – in other words investing only in companies that are kind to the environment, care about social impact and ensure good corporate governance – was assumed to deliver below-market returns, the logic being that only companies that make profit at all costs will provide better returns to shareholders than those that consider all stakeholders. However, scandals such as Steinhoff and Volkswagen, which lied about its emissions, have proven that if investors are not considering the socially responsible aspects of the companies they invest in, they will lose money.

Outperformance over the last ten years

In fact, over the last ten years, the MSCI Emerging Market ESG Leaders Index has outperformed the normal MSCI EM Index by 5.03% per annum, putting paid to the idea that socially responsible investing comes at cost.

The MSCI has a research team of analysts that assesses thousands of data points across 37 key ESG issues, focusing on company core business issues and industry issues that can create significant risks and opportunities for the company.  According to Frank Sibiya, index portfolio manager at Old Mutual Investment Group, the filter for the MSCI ESG World Index reduces the number of investable companies from 1636 down to 798 shares. From this smaller universe of shares, the index is constructed to ensure the investor has the same geographical and sector allocation as you would if you invested in the ordinary MSCI index. This is to ensure that there is no geographical or sector bias whether you are invested in the MSCI Index or the MSCI ESG Index

For example, Facebook is not included in the MSCI World ESG Index due to governance controversies including privacy and security breaches. Google is included in the index as it focuses on smart grid and renewable energy and has a high trust factor.

The top five holdings in the MSCI World ESG Leaders Index are Microsoft, Alphabet (Google), Johnson and Johnson, Visa and Cisco Systems.

The MSCI Emerging Markets ESG Leaders Index has 406 shares and the top five are Tencent, Taiwan Semiconductor, Naspers, China Construction and Housing and Dev Finance Corp.

What you need to know

There are two funds: the Old Mutual MSCI Emerging Markets ESG Index Feeder Fund gives you exposure to emerging markets, and the Old Mutual MSCI World ESG Index Feeder Fund invests in developed markets.

Although you are invested offshore into an Ireland-domiciled fund, it is available as a rand-denominated unit trust. The monthly minimum is R500 per month and if you invest directly through Old Mutual Unit Trusts there is no upfront fee. You can invest within your tax-free savings account. The total expense ratio, which includes the annual service fee, transaction costs and index fees comes to 1.07% per annum.

What is ESG?

Environmental, Social and Governance (ESG) Criteria is a set of standards for a company’s operations that socially conscious investors use to screen potential investments.

  • Environmental – water scarcity, pollution, food security and climate change
  • Social – inequality, health and safety, community considerations
  • Governance – diversity, experience of the board, independence

What is the MSCI Index?

The name initially comes from the “Morgan Stanley Capital International” and provides a common benchmark for a universe of stocks.

The MSCI World Index includes a collection of stocks of all the developed markets in the world, as defined by MSCI. It represents large- and mid-cap equity performance across 23 developed-market countries. It covers approximately 85% of the free float-adjusted market capitalization in each country and MSCI World Index does not offer exposure to emerging markets. It currently includes over 1 600 shares.

The MSCI Emerging Market Index is used to measure the equity market performance in global emerging markets. It includes 24 countries including Brazil, Chile, China, India, Korea, Russia and South Africa and includes over 1 100 shares.

This article first appeared in City Press.

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