Investing comes with risk. This article is a general discussion of the merits and risks associated with these ETFs, not a specific recommendation. Speak to an investment professional and make sure your portfolio is diversified. Tim Nash does not own any shares of the ETFs mentioned in this article.
I was honoured to appear on the Canadian Couch Potato’s podcast (you can listen here). We had a great chat about my approach to index investing and I decided it was time to update my Organic Couch Potato model portfolio.
The most profound change to the portfolio is that we can swap out the old Meritas International Equity mutual fund (with its 1.96% MER) for a couple of new sustainable ETFs that give us global exposure at a much lower cost (0.4% – 0.45%). They’re not perfect, but are a good option for people looking to build a globally-diversified portfolio with a sustainability lens:
iShares MSCI EAFE ESG Optimized ETF (Rich Countries in Europe, Australia, Far East)
iShares MSCI EM ESG Optimized ETF (Emerging Markets like China, India, Brazil)
First the bad news. Looking inside, they do a poor job of eliminating evil companies from their portfolio – the only hard screens are tobacco and controversial weapons like clusterbombs and chemical weapons. This leaves the door open for companies that produce ‘conventional’ weapons (like BAE Systems) and companies that harm the environment (like Bayer who is in the process of buying Monsanto). Not cool, right? For many people (including myself) this is still a thumbs-down.
But now the good news. Morgan Stanley Capital Indices (MSCI) is a giant global index provider that has inspired hundreds of ETFs for iShares. MSCI rates the environmental, social, and governance (ESG) performance of every company on the stock market and gives them a rating from AAA (most sustainable) to CCC (least sustainable. They put this data through their optimizer constraints (basically a fancy algorithm with other financial metrics), and out pops a list of around 400 companies that are weighted to give us maximum positive exposure to ESG scores with a similar risk/return profile to the traditional index.
For all you nerds out there, here’s a nifty infographic that describes their methodology:
Additionally, these new ETFs fall under the same proxy voting guidelines as the other iShares ESG ETFs, so we can be assured that our shares are pushing the company toward sustainability.
You’ll have to decide if it’s right for you, but I decided that the lower fees make these ETFs a welcome addition to the Organic Couch Potato Portfolio: http://www.sustainableeconomist.com/organic_couch_potato_portfolio
