State Street Global Advisors (SSGA), the asset management business behind the SPDR range of exchange-traded funds, has launched two new ETFs offering exposure to the equity performance of fossil fuel free companies listed on international developed markets, or emerging markets. The SPDR MSCI EAFE Fossil Fuel Reserves Free ETF (NYSE Arca: EFAX) and the SPDR MSCI Emerging Markets Fossil Fuel Reserves Free ETF (NYSE Arca: EEMX) complement the existing SPDR S&P 500 Fossil Fuel Reserves Free ETF (NYSE Arca: SPYX), together providing global equity exposure for the ESG-conscious investor.
Increasing regulation of carbon emissions may effectively render a large portion of known fossil fuel reserves “unburnable”.
While maintaining similar investment profiles to core broad market exposures, the ETFs screen out companies with fossil fuel reserves – defined as economically and technically recoverable sources of crude oil, natural gas and thermal coal but do not include metallurgical or coking coal, which are used in connection with steel production.
“SPDR ETFs continue to build on SSGA’s heritage of ESG (environmental, social and governance) investing,” said Nick Good, co-Head of the Global SPDR business at SSGA. “We are excited to add EFAX and EEMX to our SPDR line-up, complementing the SPDR S&P 500 Fossil Fuel Reserves Free ETF (SPYX) launched in 2015. Together, this suite of funds is designed to allow investors to maintain geographical diversification within the broader equity market while using their capital to create change.”
EAFE: Europe, Australasia and the Far East
The SPDR MSCI EAFE Fossil Fuel Reserves Free ETF tracks the MSCI EAFE ex Fossil Fuels Index. The index is designed to measure the performance of companies in the MSCI EAFE Index – a stock market index that is designed to measure the equity market performance of developed markets outside of the US & Canada – that do not own fossil fuel reserves. As of 25 October 2016, the largest country exposures are to Japan (25.7%), the UK (15.2%) Germany (9.8%), Switzerland (9.5%), and France (9.5%).
Since the index’s inception on 30 November 2010 to 30 September 2016, it has displayed a beta of 0.98 compared to the MSCI EAFE Index, indicating its ability to closely track broad market exposures. It has returned 5.6% per annum over this period, compared to 4.8% for the MSCI EAFE Index, although year-to-date (YTD) it has under-performed with a return of 0.6% compared to 1.7%.
Source: MSCI.
With 892 firms in the index the largest sector exposures are to financials (20.7%), industrials (15.2%), consumer staples (13.8%), consumer discretionary (13.2%) and health care (12.3%). Its largest constituent is Nestle with a weighting of 2.2%.
The ETF has a total expense ratio (TER) of 0.20% due to a contractual fee waiver in place until 31 January 2018. Its gross expense ratio is 0.30%.
Emerging Markets
The SPDR MSCI Emerging Markets Fossil Fuel Reserves Free ETF tracks the MSCI Emerging Markets ex Fossil Fuels Index. The index is designed to measure the performance of companies in the MSCI Emerging Markets Index that do not own fossil fuel reserves. The MSCI Emerging Markets Index captures large and mid-capitalization equity performance across 23 emerging market countries – the largest exposures being to China (29.7%), South Korea (16.7%), Taiwan (14.3%), Brazil (8.3%) and South Africa (7.7%).
With the same inception period as the above index, the fossil fuels free index has displayed a beta of 0.97 compared to the MSCI Emerging Markets Index. It has returned 0.2% per annum over this period, compared to -0.5% for its benchmark, although the index has returned 15.2% YTD compared to a superior 16.0% for its benchmark.
Source: MSCI.
There are 789 firms in the index with sector exposure to information technology (25.8%), financials (25.5%), consumer discretionary (11.4%) and consumer staples (8.5%). The largest single constituent is Tencent Holdings with a 4.1% allocation.
The ETF has a TER of 0.30%.
According to SSGA, a growing number of endowments, pension funds and other institutions are adapting their investment portfolios to accommodate for the risks associated with climate change. For institutions, ESG screening is becoming part of their fiduciary duty when making investment decisions, while individuals are increasingly looking to align their investments with their values.
Investing in companies with low exposure to the inherent risks of fossil fuels may also yield higher portfolio risk-adjusted returns, according to an increasing body of research. Looking beyond near-term risks – such as the cost of cleaning up environmental disasters – increasing regulation of carbon emissions may effectively render a large portion of known fossil fuel reserves “unburnable”, casting doubt onto these firms current business models, and placing shareholder value at risk.
Christopher McKnett, Managing Director and Head of ESG at SSGA, commented: “With governments across the world committed to addressing climate change, investors have been increasingly looking to minimize the potential negative impact that exposure to companies owning fossil fuel reserves could have on their portfolios as traditional market-cap based passive strategies that do not screen out certain industries or business practices may not account for this risk.”