global ESG / pcess609

Since ESG considerations are global in scope, it’s fitting that ETF investors have all-country strategies to choose from. The newest contender, the Mackenzie Corporate Knights Global 100 Index ETF, brings a distinct element of Canadian expertise to its mandate.

Also available as a mutual fund, the ETF is based on the flagship index developed by Corporate Knights Inc., a Toronto-based research and publishing firm. The equally weighted Global 100, which dates back to 2005, assesses companies across 25 key performance indicators (KPIs).

The KPIs encompass criteria including sustainable revenue and sustainable investment, natural-resource management, employee relations, executive pay and diversity, and supplier performance.

Companies that are deemed to be engaged in “red flag” activities such as blocking climate initiatives or contributing to deforestation are excluded from consideration, as are manufacturers of controversial weapons, the tobacco industry and providers of “adult” entertainment. Among other exclusions are drug companies that are considered to be laggards in terms of providing access to medicine.

Corporate Knights also employs conventional financial screens. To qualify for the Global 100, companies must have more than US$1 billion in annual revenue.

The main financial quality criteria, which are applied as a preliminary screen, are based on the Piotroski F-Score developed by the American accounting professor Joseph Piotroski. The F-Score is based on nine tests of financial strength, such as earnings, cash flow and debt load. Companies must pass at least three tests, a relatively low bar, to be eligible for the Global 100.

Responsible capitalism has proven to be profitable, according to historical data for the Global 100, which is reconstituted annually in January. From its Feb. 1, 2005 inception to the end of 2022, the index has returned an annualized 8.3%, compared with 7.4% for the MSCI All Country World Index.

Up until very recently, there was no way to easily invest in the 100 companies. That changed with the launch in April of the Mackenzie ETF and mutual fund, which will put the Global 100 to a real-life test.

“We saw it as a great opportunity to be able to harness Corporate Knights research,” said Prerna Mathews, vice-president, ETF product strategy at Toronto-based Mackenzie Investments. “This is their core focus. They’re not distracted by launching other indices and diversifying their business across different types of data sets.”

Mathews said Mackenzie views the new strategy as a core portfolio building block for investors who are looking for a global equity solution with broad exposure across all sectors and sustainability screening.

The final selection of Global 100 stocks is made so that the sector exposure is aligned closely with the MSCI All Country World Index. The exception to full index neutrality is the combining of the weights for the utilities and energy sectors. This enables Corporate Knights to reduce exposure to fossil-fuel companies while otherwise maintaining the concept of sector neutrality.

The Mackenzie offering joins about a dozen other global equity ETFs with ESG mandates, most of which also employ factor-based methodologies.

An early entrant was the AGF Systematic Global ESG Factors ETF, launched in February 2018. The ETF is managed internally by Toronto-based AGF Investments Inc.’s quantitative team, which seeks to employ ESG factors that have a significant correlation to future stock returns.

The portfolio is very broadly diversified, recently holding about 130 names. As of June 30, its five-year return is 7.2%, ranking in the second quartile in the global equity category, according to Morningstar Canada.

MSCI indexes are the most popular choice for factor-based global equity ETFs with ESG mandates. They’re employed by ETFs in the BMO, CI and iShares families of ETFs.

The BMO MSCI Global ESG Leaders Index ETF, for instance, employs a combination of higher ESG ratings as determined by MSCI, as well as specific industry exclusions. The strategy excludes companies that earn significant revenues from tobacco, alcohol, gambling, weapons and nuclear power. The BMO portfolio is weighted by market capitalization and rebalanced quarterly.

Though MSCI’s ESG strategies result in low weightings in traditional energy sectors, Toronto-based CI Global Asset Management goes one step further. The CI MSCI World ESG Impact Index ETF is based on a variation of the MSCI index that specifically excludes exposure to the fossil-fuels industry.

Other factor-based global equity ETFs include the Desjardins RI Multifactor – Fossil Fuel Reserves Free ETF, which is based on a Scientific Beta index created for Desjardins; and the Fidelity Sustainable World ETF. Fidelity holds stocks with high ESG ratings as defined by MSCI, while also employing a proprietary multi-factor methodology.

Another contender is the Horizons Global Sustainability Leaders Index ETF, which tracks a socially responsible NASDAQ index. One of this large-cap index’s key screens is to identify companies that are global climate-change leaders as measured by carbon efficiency. Various industries are excluded, including fossil-fuel producers, uranium and nuclear energy, gambling, alcohol and junk food.

Other global equity ETFs with an ESG focus are fully active, meaning they’re unconstrained by factor-based indexes or other quantitative methodologies.

The NBI Sustainable Global Equity ETF, sponsored by National Bank Investments Inc. and launched in January 2020, invests in companies whose products and services are aligned with the United Nations Sustainable Development Goals. Sub-advised by AllianceBernstein Canada Inc., the ETF’s holdings are subject to analysis of financial fundamentals as well as ESG factors.

The two-year-old CIBC Sustainable Global Equity ETF is managed internally by Amber Sinha, a senior global equity manager with CIBC Asset Management Inc., and Natalie Taylor, a member of the fundamental global equity team.

Taking an income-oriented approach to ESG global investing is the Middlefield Sustainable Global Dividend ETF. Managed by Toronto-based Middlefield Capital Corp., the monthly-pay ETF holds dividend-paying companies with an emphasis on ESG considerations.

Some funds with a socially responsible tilt are focused on the “E” in ESG.  Among them is the AGF Global Sustainable Growth Equity ETF, co-managed by AGF’s Martin Grosskopf and Vishal Bané. Grosskopf’s past experience includes working as an environmental scientist, and Bané is a former ESG researcher with MSCI Inc.

The AGF portfolio isn’t broadly diversified like most ESG global mandates. Instead, it focuses on several industries: energy and power technologies, water and wastewater solutions, waste management and pollution control, and health and well-being. As such, the ETF is more of a thematic play than a core global ESG strategy.