Balancing ESG exposure and valuations

Russel Chesler

VanEck Australia

Environmental, Social, and Governance (ESG) ETF use has exploded over the last few years in Australia, with total assets under management (AUM) surpassing $1.5 billion in April 2021. While investors typically focus on ESG screens as the criteria for investment selection, in the current economic environment it is more important than ever to also consider valuations and sector exposure.

Macroeconomic shift – inflation environment

Investors that have been overweight technology/growth stocks since the Global Financial Crisis have performed well, amid a backdrop of falling interest rates and boosting valuations (Chart 1). However, in recent months, murmurs of inflation talk have dominated media headlines. Global commodity prices, most notably iron ore prices have skyrocketed, surpassing US$200 a tonne for the first time (Chart 2). Commodity prices are widely considered a leading indicator for inflation (Chart 3).

If inflation does return, this could spark a dramatic sell-off in high growth/technology assets. You can read more about the potential impact of inflation on investments here. Value stocks have outperformed growth stocks over the last six months as shown above. Traditional value sectors include financials, energy, utilities and industrials.

Looking under the hood

To illustrate the potential differences in risk and opportunity, below is a comparison of two ASX listed international ESG ETFs by valuations and sector exposure relative to the benchmark.

  • ETF 1 tracks the MSCI World ex Australia ex Fossil Fuel Select SRI and Low Carbon Capped Index
  • ETF 2 tracks the Nasdaq Future Global Sustainability Leaders Index

ETF 1 is overweight value sectors financials and industrials and ETF 2 is overweight technology.

ETF 1 price to earnings is the lowest and return on equity (ROE) is the highest relative to MSCI World ex Australia and ETF 2.

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VanEck Investments Limited ACN 146 596 116 AFSL 416755 (‘VanEck’) is the responsible entity and issuer of units in the VanEck Vectors MSCI International Sustainable Equity ETF (ESGI). This is general advice only, not personal financial advice. It does not take into account any person’s individual objectives, financial situation or needs. Read the PDS and speak with a financial adviser to determine if the fund is appropriate for your circumstances. The PDS is available here. An investment in ESGI carries risks associated with: financial markets generally, individual company management, industry sectors, ASX trading time differences, foreign currency, country or sector concentration, political, regulatory and tax risks, fund operations and tracking an index. See the PDS for details. No member of the VanEck group of companies guarantees the repayment of capital, the payment of income, performance, or any particular rate of return from any fund. ESGI is indexed to a MSCI index. ESGI is not sponsored, endorsed or promoted by MSCI, and MSCI bears no liability with respect to ESGI or the MSCI Index. The PDS contains a more detailed description of the limited relationship MSCI has with VanEck and ESGI.

Russel Chesler
Head of Investments and Capital Markets
VanEck Australia

Russel is Head of Investments and Capital Markets at VanEck in Australia. An actuary with over 25 years’ experience in financial services, specialising in asset and wealth management.

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