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socially responsible ETFs

Socially Responsible ETFs

By Isaac Schweigert | July 13, 2017

ModernAdvisor was the first online investment advisor (aka robo-advisor) in Canada to offer a socially responsible investment option back in February 2016.  At that time SRI options in the ETF space were much more limited than we would have liked, as a result our SRI portfolios did not have any non-North American developed market or emerging market exposure.  We’ve since update our SRI option to include more international exposure.

In Canada, we’ve only 1 ETF that focuses on socially responsible investing, so if you want a globally diversified portfolio that is socially responsible, you need to look to the US or Europe.  Canadian online brokers offer trading in US securities, but few offer cost effective overseas trading so we will focus on ETFs that most people will have access to.

Due to foreign withholding taxes, the best account to hold a US ETF in is an RRSP, RRIF, or similar registered account (but not TFSA).  When held in one of those types of accounts the US withholding tax does not apply.  If you hold them in an unregistered account you will be charged the withholding tax, but you can claim this as a tax credit on your tax return.  Unfortunately, if you hold them in a TFSA you will be charged the withholding tax, and you can’t get it back.

There are many different socially responsible ETFs available, ETF.com has a complete list of socially responsible ETFs that trade in the US.  We will cover broadly diversified socially responsible ETFs and then highlight a few more focused options that are available.

Broadly Diversified SRI ETFs

iShares Jantzi Social Index ETF (XEN)

Canadian investors only have one choice when looking for an SRI ETF that focuses on Canadian stocks, the iShares Jantzi Social Index ETF (XEN).  XEN tracks the Jantzi Social Index, an index created by Jantzi Research, now Sustainalytics.  The Jantzi Social Index is an index of 50 companies from the S&P/TSX Composite that have been screened for environmental, social, and corporate governance criteria.  The Index screens out:

  • Companies that produce military weapons
  • Companies that produce nuclear power
  • Companies that produce tobacco products or companies that earn more that 10% of their revenues from selling tobacco products.

The Index is reviewed annually to ensure that the companies included continue to meet the ESG and exclusion criteria.  The Index aims to keep the sector weights within +/-5% of the sector weights in the S&P/TSX 60 Index.  The weight of each company in the Index is capped at 10%.

The annual cost of this ETF is 0.55%, about 10 times higher than a non-ESG ETF like XIC, but still much less expensive than a typical Canadian mutual fund.  We use this ETF in our SRI portfolios.

 

iShares MSCI USA ESG Select ETF (KLD)

Investors looking for a broad ETF tracking US stocks with an ESG focus have several to choose from.  One of the largest SRI ETFs is the iShares MSCI USA ESG Select ETF which tracks the MSCI USA ESG Select Index.  That Index starts with the MSCI USA Index and excludes companies that:

  • Produce tobacco, or that earn 15% or more of their revenue from distributing or selling tobacco products
  • Companies that earn 50% or more of their revenue from producing alcohol, or more than $1 billion in revenue from alcohol-related products
  • Companies that earn 50% or more of their revenue, or more than $1 billion in revenue, from gambling-related products
  • Companies involved in nuclear fuel enrichment, uranium mining, or nuclear reactor design or construction for nuclear power generation
  • Companies with 6000 MW or more of installed capacity attributed to nuclear sources or with 50% or more of installed capacity attributed to nuclear sources
  • Companies that manufacture conventional weapons and weapons systems and earn 50% or more in revenue, or $3 billion or more in revenue from these activities
  • All companies that manufacture cluster munitions, landmines, depleted uranium weapons, and nuclear weapons
  • All companies involved in manufacturing of bio-chemical weapon components or bio-chemical weapon systems
  • Companies classified as a Producer that earn either 50% or more revenue or more than $100 million in revenue from civilian firearms

The remaining companies are then whittled down to a maximum of 350, with a maximum of 5% in any single company.  The sector weights are not permitted to deviate from the sector weigths in the MSCI USA Index by more than +/-3%.

The annual cost of KLD is 0.50%, quite a bit higher than the S&P 500 ETF (SPY), but again, a good deal compared to most mutual funds in Canada.

 

iShares MSCI KLD 400 Social ETF (DSI)

The iShares MSCI KLD 400 Social ETF is essentially a more restrictive version of KLD above.

The alcohol, gambling, and military weapons screens are reduced to 5% of revenue or $500 million.  The civilian weapons screen is reduced to 5% of revenue or $20 million in revenue.

In addition to tightening those screens, DSI adds the following screens:

  • All companies classified as a Producer that earn more than 5% in revenue, or more than $500 million in revenue, from adult entertainment materials
  • All companies that derive any revenue from activities that genetically modify plants, such as seeds and crops, and other organisms intended for agricultural use or human consumption

The sector weights are maintained within a relative +/-25% of the main indexes sector weights.  The Index is reviewed on a quarterly basis and the number of companies in the Index are limited to 400.

The annual cost of DSI is 0.50%.  We use this ETF in our SRI portfolios.

 

iShares MSCI EAFE ESG Optimized ETF (ESGD)

Investors looking for a broad ETF tracking EAFE (Europe, Australasia and Far East) stocks with an ESG focus really only have one choice: iShares MSCI EAFE ESG Optimized ETF.  ESGD aims to track the MSCI EAFE ESG Focus Index, which starts with the MSCI EAFE index and applies ESG screens to exclude:

  • Companies that produce tobacco or companies earning more than 15% of their revenue from distributing tobacco products
  • Companies that produce military weapons including cluster bombs, landmines, depleted uranium weapons, chemical and biological weapons
  • Companies that own 20% or more of a weapons manufacturer

Those screens are a little more basic than many investors would like, but it’s a start.  Up until June 2016 no ETFs were available in North America that invested in EAFE stocks with an ESG focus.  Hopefully as more investors choose SRI, new products will become available that go further.

The annual cost of ESGD is 0.40%.  We use this ETF in our SRI portfolios.

 

iShares MSCI EM ESG Optimized ETF (ESGE)

Investors looking for a broad ETF tracking emerging market stocks with an ESG focus really only have one choice: iShares MSCI EM ESG Optimized ETF.  ESGE aims to track the MSCI EM ESG Focus Index, which starts with the MSCI Emerging Markets index and applies ESG screens and excludes:

  • Companies that produce tobacco or companies earning more than 15% of their revenue from distributing tobacco products
  • Companies that produce military weapons including cluster bombs, landmines, depleted uranium weapons, chemical and biological weapons
  • Companies that own 20% or more of a weapons manufacturer

Those screens are a little more basic than many investors would like, but it’s a start.  Up until June 2016 no ETFs were available in North America that invested in emerging market stocks with an ESG focus.

The annual cost of ESGE is 0.45%.  We use this ETF in our SRI portfolios.

 

Narrowly Focused Socially Responsible ETFs

There are many ETFs available that go beyond just tracking a major index that has been screened for environmental, social, and corporate governance issues.  There are ESG ETFs that aim to invest in companies that have low carbon footprints, invest only in clean tech or alternative energy.  There are also ESG ETFs available now that tackle social issues like workplace equality, disabilities, and follow religious doctrines.

 

iShares MSCI ACWI Low Carbon Target ETF (CRBN)

The iShares MSCI ACWI Low Carbon Target ETF starts with the MSCI ACWI Index, an index of developed and emerging market stocks, and applies a carbon screen.  Companies with lower carbon exposure receive a larger weight than those that have a higher carbon exposure.  Country and sector weights in the ACWI Low Carbon Target will not deviate more than +/-2% from the main ACWI Index, with the exception of the energy sector where no sector constraint is applied.

It is important to note that low carbon does not necessarily mean fossil fuel free.  There are still energy and mining companies in the Index.

The annual cost of CRBN is a pretty reasonable 0.20%, lower than some bond ETFs.

 

SPDR S&P 500 Fossil Fuel Free ETF (SPYX)

The SPDR S&P 500 Fossil Fuel Free ETF aims to track the S&P 500 Fossil Fuel Free Index, a version of the S&P 500 that attempts to exclude companies with ownership of fossil fuel reserves, including those for third-party and in house power generation.  Fossil fuel in this case is defined as crude oil, natural gas, and thermal coal but does not include coal used in steel making.  This means that energy and utilities companies are pretty much absent from the holdings of the ETF.

The annual cost of SPYX is a pretty reasonable 0.20%.

 

PowerShares Cleantech Portfolio (PZD)

The PowerShares Cleantech Portfolio aims to track the Cleantech Index, an index of companies with a presence in the cleantech sector primarily from the US and Europe.  Companies included in that Index must have at least 50% of their sales or operating profits from cleantech businesses, where ‘cleantech’ is defined as knowledge-based products and services that add economic value by reducing cost, raising productivity and/or product performance while reducing resource consumption and their negative impact on the environment and public health.

The annual cost of PZD is higher than for most ETFs at 0.67%.

 

VanEck Vectors Global Alternative Energy ETF (GEX)

The VanEck Vectors Global Alternative Energy ETF seeks to track the Ardour Global Index (Extra Liquid), an index of alternative energy companies including those in bio-fuels (such as ethanol), biomass, wind, solar, hydro and geothermal sources, and technologies that support production, use, and storage of these energy sources. Companies included in the Index must derive at least 50% of their revenue from the alternative energy sector. The number of companies in the Index is fixed at 30, which are market capitalization (size) weighted.

The annual cost of GEX is 0.62%.

 

Workplace Equality Portfolio ETF (EQLT)

The Workplace Equality Portfolio ETF is designed to track the performance of the Workplace Equality Index, a stock index that includes many US and foreign companies traded on a US stock exchange that support lesbian, gay, bisexual and transgender (LGBT) equality in the workplace.

The screening criteria generally include mandatory language in a company’s equal employment opportunity (EEO) statement prohibiting discrimination based on sexual orientation and gender identity, offering health benefits to same-sex partners or spouses of employees, along with other corporate benefits and privileges.

The approximately 250 stocks in the index are equally weighted and reselected annually.

The annual cost of EQLT is 0.75%.

 

That is just a small sample of the ESG ETFs available today, there are many more ESG ETFs available to choose from, and hopefully many more to come in the future.

When selecting an ESG ETF for your portfolio it is important to consider what is most important to you.  That could be supporting a certain issue like equality, or minimizing fossil fuel exposure, or simply getting the best geographic exposure at low cost while having at least some ESG awareness.  There may be no ETF that meets all of your criteria, but there should be ETFs that meet at least some of them.


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Isaac Schweigert

Isaac Schweigert

Isaac is a CFA charterholder and is Portfolio Manager and Chief Compliance Officer at ModernAdvisor. He has over 11 years of investment industry experience, including asset allocation, portfolio management, due diligence, compliance and reporting.