Impact investing and its indices. What are they?
Posted: Thu Dec 12, 2024 3:13 am
We saw in a previous post how SRI equity indices were more efficient than their benchmark indices . In line with this analysis process, in this post we are going to analyze one of the impact investment indices that make up our SRI ETF portfolios.
And our indexed SRI portfolios continue to benefit overall from this, showing a better risk/return ratio than our standard portfolios.
Table of Contents
Impact investing: global impact index
MSCI ACWI Sustainable impact vs MSCI ACWI
Returns
Appendix: main components
Examples of SRI companies
Impact investing: global impact index
We have been including the iShares MSCI Global Impact ETF in our SRI ETF index portfolios for some time now. This ETF is based on the MSCI ACWI Sustainable Impact Index, which is designed to:
“Identify listed companies whose core business addresses at least one of the world’s social and environmental challenges, as defined by the United Nations Sustainable Development Goals . Sustainable Impact categories include: nutritional products, treatment of major diseases, health products, education, affordable housing, lending to small and medium-sized businesses, alternative energy, energy efficiency, green building, sustainable water and pollution prevention.”
And more specifically:
To be eligible for inclusion in the Index, companies must generate at least 50% of their sales from one or more of the Sustainable Impact categories and maintain minimum environmental, social and governance (ESG) standards . The primary benchmark index is the MSCI ACWI.
Additionally, the Impact Investment Index excludes the following sectors: alcohol, weapons, tobacco and “ predatory lending .” For more details on the index methodology, please see here .
As we moved our SRI portfolios towards sustainability, we found it very important to have exposure to this index due to the double selection of the companies that make it up: their activity must have a positive impact on society (measured by the % of sales in some positive impact category) and at the same time meet minimum ESG standards. We find this combination very interesting and is fully in line with the values of an investor seeking sustainability.
SRI ETF portfolios
MSCI ACWI Sustainable impact vs MSCI ACWI
Let's now look at a relative comparison with the main index (the MSCI ACWI).
Source: MSCI
We see in the chart above on the left that the APR of the MSCI ACWI Sustainable (17.4%) over the last 5 years has been 3.1 percentage points higher than its main index, the MSCI ACWI (14.3%).
In the graph on the right we see, on the other hand, that gambling database volatility (risk measure) has been practically the same in this period 14.7% vs. 14.3%.
Source: MSCI
In the upper left graph that shows the risk (volatility) on the X axis and the APR on the Y axis, we see how the arrow goes up on the Y axis showing the higher APR and slightly to the right showing those higher tenths in risk.
The chart on the right shows that the Sharpe ratio is still 18% higher (1.08/0.91) for the MSCI ACWI Sustainable Impact (1.08) compared to the MSCI ACWI (0.91), indicating that the risk/return ratio is better for the impact index.
Please note that this index is much more recent than other MSCI indices. In the comparison we are using 5 years of data and therefore it may not be representative in the long term.
We observe this with the following graph:
Source: MSCI
Returns
We see that the best profitability has been especially evident in 2020 and that, therefore, the phrase “past returns are no guarantee of future returns” is more applicable than ever.
The improved performance of this index combined with the overall improved performance of the geographic SRI equity indices are benefiting our SRI ETF portfolios, which continue to show better risk/return than standard portfolios.
The incorporation of this index into our portfolios, and into impact investing in general, is done in any case for qualitative reasons ; we believe that it fits perfectly with the evolution of our SRI portfolios towards sustainable investment.
The ETF offering for this index is unique and we have used the US-based “iShares MSCI Global Impact” to gain exposure to this index. We hope that in the future there will be more options for exposure to this interesting index.
In future articles we will cover other types of impact investing that we incorporate into our SRI portfolios, whether index funds or ETFs.
Appendix: main components
Beyond the quantitative issues, we believe it would be interesting to see the weight of the indices in the following graphs:
As a professional investment portfolio manager, inbestMe also has access to US ETFs within the scope of portfolio management. US ETFs are not accessible to individual investors.
Source: MSCI
Source: MSCI
As for regions, the lower weight of the USA (28% vs. 60%) and the higher weight of Japan (13.6% vs. 5.8%) stand out.
As for sectors, the automotive industry is the most important sector, while the technological sector is very diluted within “others”.
Important note: these compositions are as of closing 8/31/2021 according to MSCI and may change due to the characteristics of the index and the companies.
In the box above on the left, we see that the index is made up of 140 companies compared to the almost 3,000 of the main benchmark index, clearly showing the selective nature of the index .
Download the socially responsible investment guide
Examples of SRI companies
In the table above we see the top 10 positions where the following stand out, for example:
Tesla (5.2%) the electric car manufacturer and solar energy provider (which alone explains the increase in the weight of the sector, and the good performance of the index in 2020),
Vestas (4.4%) is the industry leader in wind energy and sustainable energy solutions, designing, manufacturing, installing and servicing wind turbines worldwide.
West Fraser Timber Co. Ltd. (2.8%) is a Canadian forestry company that produces lumber, plywood, pulp, newsprint and wood chips based in Canada.
Index and ETF positions may change.
For a more up-to-date overview of positions, please consult here (and look for the “holdings” tab).
We are aware that as of early September 2021 Tesla is no longer part of the index, as it does not appear in the ETF's holdings. To see the most up-to-date ETF holdings, it may be useful to consult the “holdings” tab here .
2. We are aware that Tesla is no longer part of the index as of early September 2021, as it does not appear in the ETF's holdings. To see the most up-to-date ETF holdings, it may be useful to consult the “holdings” tab here .
And our indexed SRI portfolios continue to benefit overall from this, showing a better risk/return ratio than our standard portfolios.
Table of Contents
Impact investing: global impact index
MSCI ACWI Sustainable impact vs MSCI ACWI
Returns
Appendix: main components
Examples of SRI companies
Impact investing: global impact index
We have been including the iShares MSCI Global Impact ETF in our SRI ETF index portfolios for some time now. This ETF is based on the MSCI ACWI Sustainable Impact Index, which is designed to:
“Identify listed companies whose core business addresses at least one of the world’s social and environmental challenges, as defined by the United Nations Sustainable Development Goals . Sustainable Impact categories include: nutritional products, treatment of major diseases, health products, education, affordable housing, lending to small and medium-sized businesses, alternative energy, energy efficiency, green building, sustainable water and pollution prevention.”
And more specifically:
To be eligible for inclusion in the Index, companies must generate at least 50% of their sales from one or more of the Sustainable Impact categories and maintain minimum environmental, social and governance (ESG) standards . The primary benchmark index is the MSCI ACWI.
Additionally, the Impact Investment Index excludes the following sectors: alcohol, weapons, tobacco and “ predatory lending .” For more details on the index methodology, please see here .
As we moved our SRI portfolios towards sustainability, we found it very important to have exposure to this index due to the double selection of the companies that make it up: their activity must have a positive impact on society (measured by the % of sales in some positive impact category) and at the same time meet minimum ESG standards. We find this combination very interesting and is fully in line with the values of an investor seeking sustainability.
SRI ETF portfolios
MSCI ACWI Sustainable impact vs MSCI ACWI
Let's now look at a relative comparison with the main index (the MSCI ACWI).
Source: MSCI
We see in the chart above on the left that the APR of the MSCI ACWI Sustainable (17.4%) over the last 5 years has been 3.1 percentage points higher than its main index, the MSCI ACWI (14.3%).
In the graph on the right we see, on the other hand, that gambling database volatility (risk measure) has been practically the same in this period 14.7% vs. 14.3%.
Source: MSCI
In the upper left graph that shows the risk (volatility) on the X axis and the APR on the Y axis, we see how the arrow goes up on the Y axis showing the higher APR and slightly to the right showing those higher tenths in risk.
The chart on the right shows that the Sharpe ratio is still 18% higher (1.08/0.91) for the MSCI ACWI Sustainable Impact (1.08) compared to the MSCI ACWI (0.91), indicating that the risk/return ratio is better for the impact index.
Please note that this index is much more recent than other MSCI indices. In the comparison we are using 5 years of data and therefore it may not be representative in the long term.
We observe this with the following graph:
Source: MSCI
Returns
We see that the best profitability has been especially evident in 2020 and that, therefore, the phrase “past returns are no guarantee of future returns” is more applicable than ever.
The improved performance of this index combined with the overall improved performance of the geographic SRI equity indices are benefiting our SRI ETF portfolios, which continue to show better risk/return than standard portfolios.
The incorporation of this index into our portfolios, and into impact investing in general, is done in any case for qualitative reasons ; we believe that it fits perfectly with the evolution of our SRI portfolios towards sustainable investment.
The ETF offering for this index is unique and we have used the US-based “iShares MSCI Global Impact” to gain exposure to this index. We hope that in the future there will be more options for exposure to this interesting index.
In future articles we will cover other types of impact investing that we incorporate into our SRI portfolios, whether index funds or ETFs.
Appendix: main components
Beyond the quantitative issues, we believe it would be interesting to see the weight of the indices in the following graphs:
As a professional investment portfolio manager, inbestMe also has access to US ETFs within the scope of portfolio management. US ETFs are not accessible to individual investors.
Source: MSCI
Source: MSCI
As for regions, the lower weight of the USA (28% vs. 60%) and the higher weight of Japan (13.6% vs. 5.8%) stand out.
As for sectors, the automotive industry is the most important sector, while the technological sector is very diluted within “others”.
Important note: these compositions are as of closing 8/31/2021 according to MSCI and may change due to the characteristics of the index and the companies.
In the box above on the left, we see that the index is made up of 140 companies compared to the almost 3,000 of the main benchmark index, clearly showing the selective nature of the index .
Download the socially responsible investment guide
Examples of SRI companies
In the table above we see the top 10 positions where the following stand out, for example:
Tesla (5.2%) the electric car manufacturer and solar energy provider (which alone explains the increase in the weight of the sector, and the good performance of the index in 2020),
Vestas (4.4%) is the industry leader in wind energy and sustainable energy solutions, designing, manufacturing, installing and servicing wind turbines worldwide.
West Fraser Timber Co. Ltd. (2.8%) is a Canadian forestry company that produces lumber, plywood, pulp, newsprint and wood chips based in Canada.
Index and ETF positions may change.
For a more up-to-date overview of positions, please consult here (and look for the “holdings” tab).
We are aware that as of early September 2021 Tesla is no longer part of the index, as it does not appear in the ETF's holdings. To see the most up-to-date ETF holdings, it may be useful to consult the “holdings” tab here .
2. We are aware that Tesla is no longer part of the index as of early September 2021, as it does not appear in the ETF's holdings. To see the most up-to-date ETF holdings, it may be useful to consult the “holdings” tab here .