Balancing ESG Exposure and Valuations

By Cameron McCormack | More Articles by Cameron McCormack

Environmental, Social, and Governance (ESG) ETF use has exploded over the last few years in Australia, with total assets under management (AUM) surpassing $1.5bn in April 2021. While investors typically focus on ESG screens as the criteria for investment selection, in the current economic environment it is now more important than ever to also consider valuations and sector exposure.

Macroeconomic shift – inflation environment

Investors that have been overweight technology/growth stocks since the global financial crisis have performed well, amid a backdrop of falling interest rates, boosting valuations (Chart 1). However, in recent months, murmurs of inflation talk have dominated media headlines. Global commodities prices, most notably iron ore prices have skyrocketed, surpassing $200 a tonne USD for the first time (Chart 2). Commodity prices are widely considered a leading indicator for inflation (Chart 3).

Chart 1 – Cumulative performance of MSCI World Growth relative to value

Source: Bloomberg.  Indices used MSCI World Growth Index and MSCI World Value Index.


Chart 2 & 3 – Iron Ore Spot price Index 62% Import Fine Ore CFR Qingdao | US CPI versus commodity spot prices

Source: Bloomberg


If inflation does return, this could spark a dramatic sell-off in high growth/technology assets. Value stocks have outperformed growth stocks over the last 6 months as shown above. Traditional value sectors include financials, energy, utilities and industrials.


Looking under the hood

To illustrate the potential differences in risk and opportunity, below is a comparison of two ASX listed international ESG ETFs by valuations and sector exposure relative to the benchmark.

  • ETF 1 tracks the MSCI World ex Australia ex Fossil Fuel Select SRI and Low Carbon Capped Index
  • ETF 2 tracks the Nasdaq Future Global Sustainability Leaders Index

ETF 1 is overweight value sectors financials and industrials and ETF 2 is overweight technology.

Chart 4 – Sector exposure comparison relative to MSCI World ex Australia

Source: Bloomberg. As at 30 April 2021


ETF 1 price to earnings is the lowest and return on equity (ROE) is the highest relative to MSCI World ex Australia and ETF 2.


Chart 5 – Valuations comparison relative to MSCI World ex Australia

Metric MSCI World ex Australia ETF 1 ETF 2
ROE 18.4 20.6 9.6
LT Debt to Capital 40.6 35.7 30.6
Hist 3Yr EPS Growth 16.3 10.9 1.2
Price to Earnings 24.4 22.2 28.5

Source: Factset, As at 30 April 2021


VanEck’s MSCI International Sustainable Equity ETF (ASX code: ESGI) tracks the MSCI World ex Australia ex Fossil Fuel Select SRI and Low Carbon Capped Index.

About Cameron McCormack

Cameron McCormack is a Portfolio Manager with VanEck Investments. Cameron leads investment performance analytics for the firm and is responsible for trade execution for equity and fixed income ETFs. Cameron was previously at Pacific Life Re Australia where he worked in the pricing and client solutions teams. Cameron graduated with a Bachelor of Commerce majoring in Actuarial Studies and Finance from the University of New South Wales and is an Associate of the Society of Actuaries (ASA).

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