Thomson Reuters, a financial data vendor and index provider, and Future Super, an Australian superannuation fund with a focus on fossil fuel-free investments, have collaborated on two new socially responsible investment (SRI) indices: the Thomson Reuters/Future Super Australia Fossil Free Index and the Thomson Reuters/Future Super Australia Sustainable Leaders Index.
Thomson Reuters and Future Super launch ethically minded sustainability indices.
The indices, which are based on firms listed on the Australian Securities Exchange, apply various environmental, social and governance (ESG) screens and filters, and could be suitable for use as underlying references indices for index-linked products such exchange-traded funds.
“At a time when ESG investing around the world gains momentum, we’re excited to be partnering with Future Super to raise awareness of the performance of fossil fuel-free companies and to provide investors with a mechanism to invest ‘responsibly’ in fossil-fuel free and ethical portfolios,” said Stephan Flagel, Head of Indices at Thomson Reuters.
Socially responsible investing not only allows investors to choose more ethically minded investments, but some studies indicated the strategy may provide superior returns when compared to broad market equity investing. This is mainly due to reduced risk exposure to future legislation or litigation affecting the firm’s business model; however, a protracted dip in oil prices has also led to recent underperformance by fossil fuel companies and further driven the demand for transparent investment opportunities into greener firms.
Using back-tested data from the last five years, the Thomson Reuters/Future Super Australia Fossil Free Index produced an average annual return of 9.65%, compared to 7.71% for the Thomson Reuters Australia Index. This superior return was achieved with lower volatility.
As Simon Sheikh, Managing Director of Future Super, commented: “We expect demand for fossil fuel free investing to increase in the next 12 months. While a consistent stream of research has been released pointing to the poor recent performance of fossil fuel exposed companies, our fossil fuel free indices will provide potential investors with a day by day analysis of the performance of this investment strategy.”
Both indices employ a strict negative screening process to eliminate any potential constituent with direct or indirect fossil fuel exposure. For example, both indices reduce the exposure to financial institutions as all four of the nation’s largest banks lend money to fossil fuel companies and insurers underwrite them, thereby necessitating their removal from index selection. After this negative screening process, the Thomson Reuters/Future Super Australia Fossil Free Index weights the remaining constituents according to their market capitalisation.
The Thomson Reuters/Future Super Australia Sustainable Leaders Index furthermore ranks firms by their ESG scores, as determined through a proprietary model developed by Future Super. The model uses over 150 variables with a focus on numerical analysis. Some of the themes that increase firms’ scores include strong employee rights, low levels of corruption, strong corporate governance, conservation of resources, promotion of education, safe-guarding animal rights and the protection of the environment. A market-capitalisation weighting of the 50 firms with the highest ESG rankings is used to complete the index.
It is not clear whether the indices will be available for third-party licensing or whether the Future Super ESG methodology will be applied to equity markets outside of Australia.
For European investors looking for SRI-compliant exposure to Australia, they could consider the UBS ETF – MSCI Pacific SRI UCITS ETF, which is linked to the MSCI Pacific SRI Index. As of 31 August, this index has 25% allocated to Australian stocks.