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The Broad and Blurry World of 'Good' ETFs

Adam Percival

Everyone has a different definition of the word good, and nowhere is this more true than in the wide world of investing in ‘good’ ETFs. For those new to ETF investing, an ETF (exchange-traded fund) is an investment security which itself holds a basket of other securities, allowing you to get exposure to many stocks, bonds or other investments while only having to purchase the single ETF. A common example would be the ASX200 ETF, which tracks by weight the biggest 200 stocks on the ASX, and has the significant benefit of allowing you to invest in an entire index through just a single investment (saving on time, research and brokerage fees).

Stemming from the rising recognition of the need for a positive impact mindset has come a wealth of new investment vehicles to tap into, including many new ‘good’ ETFs. While of course great for opening up availability and options, this ETF boom has also created a great cloud of different (and often arbitrary) terminology, rating systems and benchmarks. These can include impact, ethical, sustainable, ESG (environmental, social and governance), responsible etc., and even ETFs that use the same terminology can apply vastly different ratings systems depending on what their creator’s (such as Blackrock, BetaShares, State Street etc.) want the purpose of these ETFs to be.

Indeed, unfortunately what these institutional players define these terms as, or what their country’s regulations define them as, may be very different to what they mean to me or you personally. Even initially deciphering the definitions or ratings systems that are used to define some of these ETFs can be very difficult and time consuming. Thus, it is important to keep in mind that the only person who can correctly define and action what impact you want your investment money to have is you.

Not all ‘good’ funds are created equal, and while many overlap their holdings not all of them have the same purview. It seems like obvious advice, but with terms such as ‘ESG’ and ‘Greenwashing’ being all the rage in the news right now it’s a good opportunity to look at your own ETF holdings in your watchlist. Try to see which flavour of impactful investing they aim to encompasse, what they companies hold, and whether or not these holdings align with your personal impact compass.

Notably, Betashares’ ETHI brings together a portfolio of climate leaders, but it should be remembered that while climate and sustainability takes the lion’s share of ESG talk, this is not a blanket ESG ETF. Indeed, one of its top holdings is Apple (here because it runs off 100% renewable energy) which has repeatedly come under fire for social and governance issues with its use of child and modern slave labour.

Blackrock’s IESG aims to give access to a broad range of Australian companies with leading ESG practices, but it has Fortescue Metals and Newcrest in its top 10 holdings, as well as major explosives companies Orica and Incitec pivot. Even if these companies are technically the best of a bad batch when it comes to ESG practices, transparency and clarity here is still an issue around what these leading practices are and what obvious negative impacts these companies still produce.

State Street’s E200, which labels itself as ‘a sustainable alternative to Australia’s flagship benchmark – the S&P/ASX 200 Index’, has BHP as its biggest holding, with Woodside coming in at number 7, both of which have been making negative sustainability press recently. BHP may be on the hook for $5bn over the Fundao Dam collapse as court proceedings continue, and Woodside’s storied Scarborough gas project has met with widespread pushback, as it is estimated to release 1.6 billion tonnes of greenhouse gases. Astute readers might notice that these are also 1st and 7th biggest holdings for the ASX itself, and for a ‘sustainable alternative’ E200 is within a basis point or two identical to the ASX200.

None of this means that ETFs or ETF producers are dishonest or trying to come off as something they’re not (usually). An ETF is a fantastic way to get access to returns from a broad range of companies without having to do hours of research into dozens of companies and take a pounding in brokerage fees along the way. All it means is that there is still some research that has to be done.

ESG assets and related ETFs for good are a very broad world, and almost everyone’s definition of what ‘good’ investments are and the many associated terms is different. Checking under the hood of your ETFs allows you to know that your money is being placed where you want it, and aligns with what your personal view on impactful investing is.

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