ETHI provides investors with a low-cost and easy way to obtain exposure to 100 large global stocks (excluding Australia) which are climate change leaders and which are not materially engaged in activities deemed inconsistent with responsible investment considerations.
The Fund owns stocks that have been identified as “Climate Leaders” that have also passed other eligibility screens designed to exclude companies with direct or significant exposure to the fossil fuel industry or engaged in other activities deemed inconsistent with responsible investment considerations.
Traditionally, the global ethical and ESG investment funds available to Australian investors have been largely focused on small and mid-cap stocks, often with significant overweights to clean tech and clean energy stocks. For those investors seeking a broadly diversified global portfolio, such a portfolio can lead to high “tracking error” relative to global indices and heavy reliance on the ability of fund managers to pick stocks in what has been historically a volatile sector. By contrast, ETHI provides simple, cost-effective and transparent exposure to a portfolio of sustainable, ethical companies from a broad range of global locations.
ETHI focuses on:
a) Climate leaders- Carbon efficiency - Companies are at least 60% more carbon efficient than the average for their industry
b) Climate leaders- Avoided emissions - A small portion of the index (less than 3% currently) is reserved for companies that are directly involved in facilitating the transition to a sustainable energy future, being companies whose products/services promote reductions in greenhouse gas emissions (e.g. companies involved in renewable energy, energy efficiency, etc).
c) A wide range of ESG screens - Excludes companies that have direct or significant exposure to the fossil fuel industry and those that are engaged in other activities deemed inconsistent with responsible investment considerations
ETHI aims to track an Index which comprises 100 large global stocks which are climate change leaders and which have no material exposure to a range of negative ESG activities.
1. Initial list of circa 6000 securities for which greenhouse emissions data is available (currently sourced from Trucost).
2. Positive screening of climate leaders (carbon efficiency) - Using data from Trucost, a global universe of over 6000 of the world’s largest stocks is filtered to include only companies whose carbon efficiency is at least 60% better (i.e. 60% lower) than the average for that company’s industry. The carbon efficiency of a company is based on the total greenhouse gas emissions from the company’s operations, fuel use, supply chain and business activities. To facilitate comparisons among companies of different size, each company’s carbon impact is calculated based on total greenhouse gas emissions (fuel use, supply chain and business activities)/Market capitalisation.
3. Geographic, Liquidity Screen, Market Cap - The list of Climate Leaders is reduced to only those companies which have a primary listing on large developed share markets, excluding Australia. The stocks must also have a minimum three-month average daily dollar trading volume of $1 million USD and a market capitalisation above $USD 3 Billion.
4. Positive Screening for Climate Leaders (“Avoided” carbon emissions) - Climate leaders also include companies whose activities produce net positive climate benefits through downstream reductions in greenhouse gas emissions. These companies are considered to be superior performers in terms of avoided (or “Scope 4”) carbon emissions – typically companies with primary business activities in renewable energy, energy efficiency, sustainable agriculture and land use, and carbon sequestration. These companies are directly involved in facilitating the transition to a sustainable energy future. Five spots in the index are reserved for companies of this kind (provided they meet the other eligibility criteria). These companies are typically at the smaller end of the size range in the index, so generally account for less than 3% of the index by market capitalisation.