Ethical ETFs in vogue amid tobacco sell-off

Jun 10th, 2016 | By | Category: Alternatives / Multi-Asset

AXA Group announced last month that it was planning to sell around €1.8bn in tobacco investments. The announcement came as interest in ethical investing via exchange traded funds has boomed, with global assets under management rising nearly 45% since 2014, according to data from BlackRock.

Tobacco stocks may be strong performers, but ETFs ex tobacco have also offered strong returns

Tobacco stocks may have performed well, but ETFs ex tobacco have also offered strong returns

There are good reasons why tobacco stocks are being shunned. According to the Centers for Disease Control Prevention (CDC), “Cigarette smoking harms nearly every organ of the body, causes many diseases, and reduces the health of smokers in general.”

And the masses also agree. In the UK smoking rates among adults have more than halved since 1974 when 51% of men and 41% of women smoked, according to statistics from ASH (Action on Smoking & Health). In the US there is a similar story with only 16.8% of people smoking, down from 20.9% in 2005, according to CDC.

However, from an investment stance, tobacco stocks have been a pretty strong performer in the last few years. British American Tobacco (one of the largest tobacco firms with market cap of £78bn) has seen its share price rise 52% to 4,167 (last week) over the last five years. In the last year it has risen 19%.

Despite this performance, the growing assets in ethical ETF investing suggest that tobacco stocks are slowly going out of favour.

Adam Laird, passive investment manager at Hargreaves Lansdown, says that “there is a growing call for ethics to feature more highly in investment choice: insurance companies, pension managers, even Prince Charles.

The advent of ETFs has been one of the biggest drivers in access to the sector. They have opened up a previously difficult and expensive market, and European investors have shown the most interest.

BlackRock’s data shows that of the $1bn worth of flows into global ethical ETFs last year, Europe contributed $578m.

Deborah Yang, head of MSCI indexing EMEA, added that since 2014 eight of its 11 SRI (socially responsible investing) indexes have been in Europe alone. “We now see a lot of interest coming from institutional investors, ETF providers and wealth managers.”

There are a number of reasons contributing towards the uptake in ethical investing and Yang argues that it is now likely to become the new normal, as Yang says: “A lot of factors have come together to boost ESG awareness. Investors are now able to access the sector through nearly all investment vehicles.”

Laird explains: “Most ethical funds have a screening process – removing undesirable assets, or taking the best in class for each sector. Many on principle exclude arms manufacturers, tobacconists or nuclear industries. The other option is funds which might buy poorly performing companies, but which engage with management to try to improve standards.”

The changing demographic has also helped boost the sector.

Andrew Walsh, head of UK ETF sales at UBS, adds that younger investors (millennials) now expect companies to be ethical. “Companies now are more aware on their supply chains and exposure to ESG. They are having to raise their game as investors increasingly expect it. There is now a lot of information on company behaviour and there is a lot more transparency in this sector.”

Yang adds: “There is a changing demographic with a new generation coming in. This is very much the case with pension funds who are now looking to go into an equity ESG benchmark. Seeing this happen, at a pension fund level, is a big thing because the impact it has trickles down throughout the investment chain, so more people are aware of ESG.”

From pension funds alone there are some $36bn assets tracking ESG MSCI indices.

Notable ETFs that have performed well and screen out tobacco stocks are both offered by iShares:

The iShares MSCI USA ESG Select ETF (KLD) tracks the MSCI USA ESG Select index, which screens out tobacco stocks. It is listed on NYSE Arca, has a total expense ratio of 0.50% and assets of $379m under management. Most tellingly is that over 5 years it has seen returns of around 63% and year to date has returned 5.14%, according to the iShares factsheet.

Similarly, the iShares MSCI KLD 400 Social ETF (DSI), which is also listed on NYSE Arca, has a TER of 0.50% and assets of $105.9bn, is available for those wanting restricted investing. It tracks the MSCI KLD 400 Social index automatically excludes securities of companies involved in Nuclear Power, Tobacco, Alcohol, Gambling, Military Weapons, Civilian Firearms, GMOs and Adult Entertainment. Additions to the index are made from a list of eligible companies based on considerations of ESG performance, sector alignment and size representation. In the last five years it has returned  71%, while year to date returns are more modest at 3.2%, according to iShares.


However, Laird warns that there are always good and bad investments and socially responsible investing is no different. “Investors shouldn’t put the ethical cart in front of the investment horse – review every aspect of a fund before making decisions.”



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