The Ecofin Global Water ESG Fund is a passive ETF which tracks the performance of the Ecofin Global Water ESG index, consisting of companies that are involved in, and benefit from, solving the water supply/demand imbalance. The ETF has a Morningstar rating of 4 out of 5 stars and an MSCI ESG rating of AAA, which corresponds to a relatively low risk (although I’m hesitant to take this as a statement about their overall sustainability as MSCI ratings disregard financially irrelevant ESG risks).
Whilst the ETF’s top holdings are sustainable, the methods used to select them are too lenient in their consideration of ESG risks. Ecofin also lacks transparency in their carbon footprint and diversity and inclusion reporting despite their involvement with carbon and climate disclosure organisations.
The Ecofin Global Water ESG Fund’s net assets amount to $58.994bn as of 12th July 2022. Its top 10 holdings are as follows: American Water Works Company 7.9%, Ecolab 7.8%, Geberit Ag-Reg 7.3%, Ferguson 6.9%, Veolia 6.8%, Xylem 5%, Essential Utilities 4.2%, Severn Trent 4.2%, United Utilities Group 4.1%, and Tetra Tech 3.9%. These holdings are spread across a variety of sectors, mainly utilities (36%), pipes, pumps, and valves (35%), and filtration treatment and testing (24%), but still manage to maintain a high degree of relevance to the central theme of the fund as they all concern water infrastructure, management, or technology – I find this commendable as the ETF has achieved sector-diverse holdings to improve security whilst still investing in companies that are working towards fixing the water crisis.
The holdings’ ratings are, however, negatively affected by Ecolab’s environmental violations. After incorrectly disposing of a pesticide in 2019, they caused a fire at the company’s facilities in Washington resulting in a fine of $214k for violating federal hazardous waste and pesticide laws. I’d say this demonstrated a certain degree of negligence, although not an active disregard for the environment, especially considering that the leaked chemical phosphine doesn’t pose a large risk for ground and surface water contamination. Considered alongside the positive impact of Ecolab’s water treatment products and its position as one of the leading water, hygiene, and infection prevention companies, this detail shouldn’t automatically lead to the exclusion of Ecolab from an the ETF’s portfolio.
One of American Water Works Company’s subsidiaries West Virginia America Water Company (which is 99.97% owned by American Water Works Company) was also involved in a controversy where they were responsible for a chemical spill in 2018 that deprived several hundred thousands of residents from having access drinking water in West Virginia, later paying a penalty of $126m. This is something to note but overall less relevant to the ETF’s sustainability as West Virginia Water Company isn’t included in its holdings.
Barring Ecolab’s blunder, I’d say the ETF’s overall holdings are sustainable. The top ten holdings are all specific to the proposed goal of solving the increasingly urgent problem of the water supply/demand imbalance, an important aspect of liveability, and improving access to drinkable water could also have secondary effects such as mitigating the waste production from single-use plastic bottles.
Ecofin lays out the criteria for their Global Water ESG Index in detail on their website. The index maintains its relevance to the water industry by selecting companies that derive 50% of their revenues from industry-related activities, or drive 40% of their revenues from the water industry whilst being one of the top five companies in a sub-industry, for example water infrastructure or water equipment. All companies included in the ETF’s holdings must have a minimum market capitalisation of $400 million for two consecutive quarters and the portfolio is rebalanced quarterly. I’m satisfied that these criteria support the ETF’s aim as the resulting holdings consist of leading companies in the water industry which are most likely to have the resources available to best combat the water crisis. Although the minimum market capitalization of $400 million ensures that the portfolio is made of established organisations, I do think that this limits the fund to predominantly US-based holdings, when in fact countries in Africa and Asia are most affected by water shortages. The ETF could therefore be improved through greater involvement in these regions and this would also better represent the ‘global’ nature of the index.
Ecofin outsources their analysis to Sustainalytics, setting a minimum ESG score of 48 for a company to be included in the ETF’s holdings. Sustainalytics is a reputable and widely used ESG scoring system and using external evaluation limits the possibility of internal subjectivity and loopholes, but a score of 48 is a surprisingly lax requirement given that it corresponds to a severe ESG risk. I’m additionally unimpressed by their condition that merely 80% of the index needs to meet this ESG score, with companies only being removed if they fail to meet the threshold for three consecutive quarters or alternatively being more than eight points out. Ecofin sets a very low bar for what they consider sustainable enough for the Global Water ESG Fund and I’d like to see them decide on more rigid prerequisites that lead to an entirely sustainable index rather than making what currently seems like a tentative commitment.
TIS Advisors act as the investment advisors to the Ecofin Global Water ESG Fund, with Vident Investment Advisory (VIA) acting as the sub-advisor. The fund is managed by VIA employees Austin Wen and Rafael Zayas, both of whom lack previous sustainability experience although this is less of an issue given the ETF is passive and its components depend on the index composition.
Ecofin itself is an investment firm focussed on sustainability and has been around since the 1990s. Their thematic funds convince me that sustainability is one of their main priorities as they invest directly into it with the main themes of electrification, clean transportation, industrial and building efficiency, and environmental, rather than trying to incorporate ESG into their existing strategy. This is backed up by the employee structure of the company, which is small but still houses a dedicated sustainability and impact team which is divided into further sections such as integration and active ownership, measurement and reporting, and corporate social responsibility.
Ecofin is very active in the sustainable investing space, being affiliated with a number of organisations covering impact investing and climate impact disclosure. Given their apparent dedication to transparency and social and environmental initiatives, I find the lack of information available concerning their carbon footprint or diversity and inclusion odd. Whilst their sustainability reports cover their top holdings in great detail, Ecofin doesn’t disclose a great deal of data on their own emissions which raises issues with transparency as energy consumption and waste production are an important part of evaluating a company’s sustainability. They do offer a detailed insight into their product rating methods and index selection but I would like to see how green their buildings and operations are, as well as how they encourage diversity in the workplace.