The MSCI Emerging Markets IMI ESG Screened Index offers largely the same characteristics as its parent index MSCI EM IMI, including large-, mid-, and small-cap securities across 24 emerging-markets countries. The fund's sector allocation appears very similar to that of MSCI EM IMI.
Starting with the MSCI EM IMI, the MSCI EM ESG Screened Index excludes companies: 1) that are associated with controversial, civilian and nuclear weapons, and tobacco; 2) that derive revenues from thermal coal and oil sands extraction, or 3) that are not in compliance with the United Nations Global Compact principles.
The top five exclusions are Vale (Brazilian mining), Petrobras (Brazilian energy), ITC (Indian tobacco), Nornickel (Russian mining), and Walmart de Mexico (Mexican consumer).
The MSCI EM IMI ESG Screened Index is reviewed on a quarterly basis to coincide with the regular semiannual and quarterly index reviews of the MSCI Global Investable Market Indexes. The changes are implemented in February, May, August, and November.
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The fund’s ongoing charge of 0.18% is not only lower than the category median but also among the lowest in the global emerging-markets equity Morningstar Category matching to the fee level of those cheap non-ESG plain-vanilla emerging-markets index trackers. The emerging-markets equity passive funds' average fee stands at 0.40%.
Launched in October 2018, the fund so far has shown tight tracking ability with a three-month accumulated tracking difference (fund return minus index return) of 0.06%.
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The fund employs optimising techniques to replicate the performance of the MSCI EM IMI ESG Screened Total Net Return Index. The fund may include the strategic selection of certain securities that make up the index or other securities that provide similar performance to certain constituent securities. These may also include the use of financial derivative instruments to a limited extent.
The fund does not engage in securities lending.
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As we expect the fund’s performance edge to be propelled by its low fee, we grant the fund a Morningstar Analyst Rating of Bronze.
The MSCI EM IMI ESG Screened Index excludes companies that are associated with controversial, civilian, and nuclear weapons and tobacco; companies that derive revenues from thermal coal and oil sands extraction; and those that are in violation of the United Nations Global Compact principles.
The exclusion of around 120 stocks out of the 2,710-plus holdings in the parent does not make a meaningful difference to the portfolio with top 10 exclusion representing less than 3% of the parent index. The seven-year back-tested tracking error has been low at 0.59%, showing a similar risk/return profile to that of the parent index.
The MSCI EM index is broad and well-representative of the average fund in the emerging-markets equity category, but it has country and sector concentration risk due to the market-cap-weighting methodology. The ESG-Screened Index also has the same issue: country concentration with China representing over 30% and sector concentration and financials making up 25% of the portfolio.
It is worth noting that the MSCI ESG screened methodology results in a relatively light improvement in sustainability scores; hence, investors seeking a stronger ESG footprint should look elsewhere.
Lastly, at 0.18%, the fund has one of the lowest ongoing charges in the emerging-markets equity category.
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Sustainable investing is a long-term approach that incorporates environmental, social, and governance factors into the investment process. Given the increasing recognition that sustainability issues can affect a company’s bottom line, it is sensible to consider ESG aspects in a thorough investment process, especially one with a long-term perspective. This could also mean completely avoiding investing in companies whose business activities are broadly considered as unethical.
The MSCI EM IMI ESG Screened Index uses proprietary business involvement research to identify companies involved in controversial activities. These include controversial and nuclear weapons, civilian firearms, tobacco, thermal coal and oil sands, as well as companies in violation of the United Nations Global Compact principles.
As of this writing, the fund has an Average Morningstar Sustainability Rating of three globes. The rating is a measure of how well the companies held by a fund are managing their ESG risks and opportunities when compared with similar funds, including funds without a explicit sustainability mandate.
The MSCI EM is a broad well-representative benchmark for emerging markets but entails sector- and country-level concentration risks. China’s weighting is currently over 30% and increasing further, while financials represents 25% of the total portfolio. Because of the heterogeneous characteristics of emerging markets, such a simple market-cap-weighted index has not proved to be the best strategy to invest in emerging markets and has fallen behind some active strategies.
The MSCI EM IMI ESG Screened Index does not vary meaningfully from its parent MSCI EM IMI as the ESG screening excludes a mere 3% of the total parent portfolio, or around 120 stocks out of 2,710. The seven-year back-tested tracking error is a mere 0.59%, meaning investors can expect the fund to deliver similar risks and returns as its parent index.
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Many providers offer standard MSCI Emerging Markets Index exchange-traded funds including iShares, UBS, Xtrackers, Amundi, and Lyxor with ongoing charges ranging between 0.18% and 0.75%. Amundi MSCI Emerging Markets ETF (synthetic replication) with an ongoing charge of 0.20% and iShares Core MSCI Emerging Markets IMI ETF (physical replication) with an ongoing charge of 0.18% are some of the cheapest options in the category.
Investors seeking a more comprehensive ESG portfolio that leans towards companies with better sustainability profiles would be better-served with an MSCI SRI ETF that selects only the top 25% ESG rated companies from the parent universe. For example, iShares MSCI EM SRI ETF has a much lower number of constituents than its parent MSCI EM Index (180 versus MSCI EM Index’ 1,136), and the portfolio has significantly improved ESG scores compared with iShares MSCI EM IMI ESG Screened ETF.
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