Satrix became the first local issuer to list ESG exchange-traded funds (ETFs) on the JSE with the launch of two new funds on Thursday. The Satrix MSCI EM ESG Enhanced ETF and the Satrix MSCI World ESG Enhanced ETF provide investors with coverage of emerging and developed markets, respectively.

Both ETFs make use of the feeder fund structure that has become popular for local issuers offering offshore exposure. The Satrix MSCI EM ESG Enhanced ETF invests into the iShares MSCI EM ESG Enhanced Ucits ETF, while the Satrix MSCI World ESG Enhanced ETF invests into the iShares MSCI World ESG Enhanced Ucits ETF.

The MSCI ESG Enhanced Focus indices that these funds track are based off their parent MSCI indices, but exclude companies operating in ESG-sensitive sectors. This includes stocks that make more than 5% of their revenue from thermal coal mining or power generation, oil sands extraction, tobacco, controversial weapons, civilian firearms or nuclear weapons.

Developed markets

The MSCI World ESG Enhanced Focus Index currently has 1,490 constituents, as opposed to the 1,601 in the MSCI World Index. The iShares ETF into which the Satrix fund feeds holds 1,317 of those.

Just like its parent index, the MSCI World ESG Enhanced Focus Index it is heavily weighted towards the US market. It carries a 66% exposure to US-listed stocks.

Its largest constituents are Apple, Microsoft, Amazon, Facebook and Alphabet, which together carry a weighting of 15.4%. These same five stocks are 15.1% of the MSCI World Index.

Source: MSCI (click to enlarge)

As the below graph shows, the MSCI World ESG Enhanced Focus Index has delivered performance closely aligned to that of its parent index, with marginal outperformance, since 2012.

Source: MSCI (click to enlarge)

Emerging markets

The MSCI Emerging Markets ESG Enhanced Focus Index is also widely diversified. It has 1,251 constituents, of which the iShares ETF holds 906. The parent MSCI Emerging Markets Index has 1,383 constituents.

However, it is more concentrated than its developed market equivalent, with the five largest holdings having a weighting of 27.2%. Those are Alibaba, Taiwan Semiconductor, Tencent, Samsung Electronics and Meituan Dianping. (Naspers is the seventh-largest stock in the index and if its weighting is added to that of Tencent, the concentration in the top five stocks climbs to 28.5%.)

The MSCI Emerging Markets ESG Enhanced Focus Index does slightly down-weight China, from 42.5% in the parent index to 39.9%. It also up-weights financials from 17.8% of the MSCI Emerging Markets Index to 21.6%.

Source: MSCI (click to enlarge)

Its tracking error is therefore slightly wider than is the case with its developed market equivalent. As the graph below shows, it has shown a fairly consistent level of outperformance over the past five years.

Source: MSCI (click to enlarge)

The Satrix MSCI World ESG Enhanced ETF targets an annual total expense ratio (TER) of 0.4%. The Satrix MSCI EM ESG Enhanced ETF has a targeted annual TER of 0.5%.

‘Investors have a growing desire for their portfolios to reflect good environmental, social and governance principles,’ said Satrix CEO Helena Conradie. ‘These new ESG ETFs allow investors to pursue these objectives while offering global equity exposure across developed or emerging markets.’

The JSE noted that these listings lift the total number of ETFs on the bourse to 78.

‘We are excited to list two global ESG focused ETFs that broaden our investment offerings in a world where environmental, social and governance factors play an integral role in investment decision making,’ said Valdene Reddy, director of capital markets at the JSE. ‘Impact investing has become increasingly topical, and for us to provide investors with access to sustainable investment options is a key focus.’