1 min read

Ethical ETFs will often create ethical screening criteria to decide on the companies they include in their ETF. Unfortunately, ETF managers are not always clear about how their screens are applied. 

So, SIX has done the hard work for them. This blog will break down the main negative screens that the 4 largest Australian and international ethical ETFs apply, and how strict these screens are.

5 min read

Rather than buying shares in an individual company, you can buy shares in an ETF (Exchange Traded Fund). This allows you to invest in a fund with multiple companies in it with just one trade.  ETFs are a low-cost way to own a piece of lots of companies, and they can lower your risk by spreading your investment across these companies.

It's like buying a bag of party mix instead of just snakes — sure, there might be a couple of rogue licorice-flavoured lollies that no one wants, but overall you get a variety of flavours.

Check out this blog about investing in ethical ETFs on the ASX for more info.

Ethical screening is a tool you can use to align your investments with your values by removing your exposure to activities you don’t agree with. In this case, exposure means whether or not the money you invested is involved with these activities. Ethical ETFs use rules to include or exclude companies based on ethical or sustainability criteria. 

Negative Screening

Negative screening has been traditionally used to avoid ‘sin stocks’ that make money from unethical activities that exploit people and the planet. For example, gambling and tobacco companies make money from many customers who are addicted to their products, as opposed to the occasional punt or cigarette. More and more investors are also excluding fossil fuel stocks as the public has become aware of the role of fossil fuel companies in exacerbating climate change.  

Usually, a fund claiming to be ethical applies screens for these activities. 

‍But not all ethical claims are equal. 

Some ETFs apply a full ethical screen to an activity, removing companies that earn any revenue from it. Others apply only a partial ethical screen that applies beyond a certain threshold, such as when the company earns more than 10% revenue from that activity.  

Unfortunately, ETF managers are not always clear about how their screens are applied. 

So SIX has done the hard work to break down which key negative screens the 4 largest (in terms of funds under management) Australian and international ETFs apply, and how strict they are.

¹All ETFs listed in this table will exclude companies that earn 5% or more of gross revenue from alcohol production, except for RARI where the threshold is 10%.

²VETH excludes companies that earn 5% or more revenue from producing alcohol.

³VETH excludes companies that earn 5% or more revenue from operating casinos or gambling establishments and those that earn 10% or more revenue from manufacturing specialised equipment used exclusively for gambling.

⁴RARI excludes companies that earn 2% or more revenue from thermal coal mining and coal power generation, and companies that earn 10% or more revenue from oil and gas exploration, power generation, refining, transport and storage.

⁵RARI excludes companies that earn 10% or more revenue from manufacturing gambling products and or from distributing gambling products.

⁶IESG excludes companies that earn at least 15% revenue from the extraction and production of oil and gas and companies earning 5% or more revenue from thermal coal-based power generation and thermal coal mining.

⁷IESG removes companies that earn 5% or more gross revenue from manufacturers or civilian weapons, and companies that earn any revenue from controversial (e.g. biological), conventional and/or nuclear weapons.

You can read the full ethical profiles of these ETFs on the SIX app:

FAIR, VETH, RARI, IESG

The Responsible Investment Association of Australasia (RIAA) found that over 55% of Australians want to avoid investing in gambling, weapons, and tobacco, and that these issues ranked in the top 6 issues they want to avoid. The only ETF we looked at that completely excludes those industries is FAIR. IESG was close, completely excluding gambling and tobacco, but allowing a small revenue exposure to civilian weapon makers. 

Companies that make gambling, tobacco and alcohol products tend to make most of their money from those activities, meaning partial ethical screens are still likely to remove them from the portfolio. 

On the other hand, some companies might produce fossil fuels as a smaller revenue source and be able to sneak past the ethical screens. For example, RARI invests in Seven Group Holdings which owns 30% of Beach Energy, a company involved in expanding oil and gas projects.

If your main concern is completely avoiding fossil fuels, which make up a large percent of the ASX compared to overseas share markets, then FAIR and VETH may be ones to consider. 

The choice is yours!

⁸All ETFs listed in this table will exclude companies that earn 5% or more of gross revenue from alcohol production.

⁹Excludes companies earning over 15% for oil and gas, 5% for coal.

¹⁰IWLD removes companies that earn 5% or more gross revenue from manufacturers or civilian weapons, and companies that earn any revenue from controversial (e.g. biological), conventional and/or nuclear weapons.

¹¹VESG excludes companies that earn 5% or more revenue from operating casinos or manufacturing gaming machines.

¹²ESGI removes companies that earn 5% or more revenue from conventional weapons and companies that earn any revenue from controversial and civilian weapons.

¹³ESGI removes companies that earn 5% or more revenue from operating casinos or manufacturing gaming machines.

¹⁴ESGI removes companies that earn 5% or more revenue from producing or manufacturing tobacco products.

You can read the full ethical profiles of these ETFs on the SIX app:‍

ETHI, IWLD, VESG, ESGI‍

ETF providers often use the same ethical screens for international and Australian shares, so the results here are very similar to the table above. 

Betashares’ ETF ETHI has the most comprehensive ethical screens, only allowing a small revenue exposure to companies producing alcohol. However, different share markets have different levels of exposure to certain industries. For example, weapons makers are much more prominent in US share markets than in Australian share markets. Ethical investors wanting to completely avoid weapons might consider ETHI and VESG.

Ready to invest in ethical ETFs? Join SIX and create an account today.

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Disclaimer: Information in this blog is general in nature only. What is right for me might not be right for you. No individual person’s needs or objectives were taken into account when preparing and communicating this information. Any mention, or opinion, of a company is not a recommendation to buy or sell. You should do your own research or seek personal financial advice before investing to ensure you make decisions that are right for you. SIX has no current affiliations or relationships with any of these ETFs.