Creating ESG portfolios for long-term growth

ESG screening

Once we’ve identified ETFs that meet our preset quality standards, Moneyfarm’s ESG approach is to select instruments that have only the highest rating against industry standard ESG metrics.

Preliminary selection of ETFs with an ESG layer

Firstly, for corporate bonds and equity, we select only a pool of ETFs that have an ESG layer. This selection is based on Articles 8 and 9 of the Sustainable Finance Disclosure Regulation (SFDR).

Initial analysis of ETF index rules

We then apply an initial screening process, in which we analyse how the indices are built, what their targets are, what metrics are used in the analyses and what companies they include.

Selection of ETFs with a negative screening on severe social controversies rules

We then make sure that the Index Rules apply a negative screening process on social controversies, which consists in eliminating all those companies in which revenues are not aligned with the ten principles of the United Nations Global Compact. This means that companies should operate in ways that, at a minimum, meet fundamental responsibilities in the areas of human rights, labour, environment and anti-corruption. We conduct ex-post analysis to verify that the information contained in the index methodology prospectus is equivalent to the final exposure of the ETF.

Selection of ETFs with a high ESG rating

This next step is to select ETFs on the basis of their ESG risk exposure. Specifically, we select ETFs with the highest MSCI ESG rating, which is calculated by answering the following two questions:

This steps allows us to create ESG portfolios that are more resilient to ESG risk.

Selection of ETFs with a focus on Environmental Externalities

We proceed with a further selection process, where we choose ETFs that are built taking    into consideration environmental risk and externalities.  After analysing the index methodology, we measure the resulting Weighted Average Carbon Intensity (Tons CO2/$M Sales) of the portfolio that indicates the investment's exposure to potential climate change-related risks.   The objective is to invest in those companies that prove to be more resilient to climate change and have a business plan that is more aligned to the Paris Agreement goals.

Selection of ETFs based on Asset Manager engagement levels

For this final step we filter using our ESG Engagement Layer, a proprietary framework to evaluate the active engagement of company shareholders. Within ESG Investments, engagement is becoming increasingly important for differentiating good and bad ESG propositions, since it signals a company’s long-term commitment towards sustainability.  Our framework evaluates (1) How ETF issuers vote, (2) Asset Manager engagement on environmental topics, (3) Alignment of the fund to the Paris Agreement goals, (4) Asset Manager policies and structure for proxy voting and engagement, (5) Pledges signed (ie CA100+, UN PRI).

The framework uses both third-party analysis and additional due diligence performed by Moneyfarm. The result of the analyses is a score from 0 to 1 that is integrated with an active discussion with ETF issuers representatives.

When all previous conditions are met equally, preferential selection applies to ETFs that have a higher Engagement score. This framework also allows us to maintain continuous engagement with ETF issuers, which can ultimately result in influencing their activism with investee companies.