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Creating ESG portfolios for long-term growth

With evolving regulations and policies within ESG, making the right investment choices isn’t always clear cut. Extensive data gathering, constant monitoring and active risk-assessment are continuously needed to make sure personal finances are put to best use. That’s why our socially responsible portfolios are built based on a careful selection process, ensuring they maintain the quality of traditional portfolios, while meeting only the highest of ESG standards.

On top of our standard portfolio creation processes, our approach to ESG adds Socially responsible ETF quality assessment, ESG data gathering and a bespoke screening process, including the Moneyfarm ESG engagement layer – a framework we developed to get closer to a fund’s assets and determine your portfolio’s ESG suitability in more detail.

Socially responsible ETFs

Our range of socially responsible portfolios follow the Moneyfarm tradition and are built using Exchange Traded Funds (ETFs). While traditionally ETFs are primarily chosen on the basis of top market performance, ESG factors add an extra layer of complexity to our selection process. In ESG portfolios we take a step-by-step approach that allows us to select ETFs that meet our traditional quality requirements while complying with only the strictest of ESG standards.

High quality

The first step of our selection process consists in the identification of high quality ETFs. Here we run our usual ranking of ETFs, which is based on the evaluation of a number of metrics, including cost, spread, tracking error, and method of replication. This ultimately allows us to calculate the Moneyfarm Quality Score and immediately filter out all ETFs that don’t fit our quality standards.


We use ETFs to construct our ESG portfolios because they enable our customers to have balanced and well-diversified investments with a greater focus on sustainability. ETFs are also more liquid, transparent and cost-efficient options that allow us to create portfolios that are more resilient to ESG risks and at the same time are free from social controversies.

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:

  • Of the negative externalities that companies in an industry generate, which issues may turn into unanticipated costs for companies in the medium to long term?
  • Conversely, which ESG issues affecting an industry may turn into opportunities for companies in the medium to long term?

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. 

The Moneyfarm ESG engagement layer measures 5 dimensions

Asset Manager engagement on environmental topics
Alignment of the fund to Paris Agreement goals
Asset Manager policies and structure for proxy voting and engagement
How ETF issuers vote
Pledges signed (eg CA100+, UN PRI)

ESG is here to stay

Financial decisions play a key role in designing the world we live in, giving investors the power to drive the social impact we so urgently need.

ESG has gathered momentum in recent years and has seen a critical step-change in 2020. ESG investments will inevitably impact company decision-making, as well as capital allocation, leading to potentially lower capital costs and less exposure to risks for better-rated ESG companies. Such a rapidly changing and evolving context as ESG and sustainability, however, calls for extra time and knowledge to get financial decisions right.

That’s why thorough research, active management, and strategic expertise are needed, now more than ever, to get the most out of one's personal investments.

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