Xtrackers MSCI Europe ESG UCITS ETF focuses on direct investments in ESG related stocks in the European market, providing diversified exposure to large- and mid-cap equities. The dividends in the fund are reinvested and then accumulated. The total net asset is currently worth 740.34 Million EUR. According to the Morningstar Sustainability Rating and the DWS ESG Portfolio Quality, this fund has an above-average ESG performance.
By adopting a series of screening and selection methods, it is stated that only companies with low carbon emissions and a high ESG rating will be considered in this fund’s investment decisions. The high level of disclosure of investment strategy and comprehensiveness of their selection criteria makes their statement fairly convincing. On top of that, the entity itself also pays attention to reducing its carbon footprint and generating renewable electricity. So, overall, this fund is rated 1.3 planets.
The fund composition has an overall high diversity, with healthcare and financial sectors being the dominant constituents. The Top Ten Holdings of this fund are (NAME, percentage of portfolio):
1) ROCHE ORD, 6.67%; 2) ASML HOLDING ORD, 5.69%; 3) ASTRAZENECA ORD, 5.17%; 4) NOVO-NORDISK ORD, 4.75%; 5) UNILEVER PLC ORD, 3.02%; 6) GLAXOSMITHKLINE ORD, 2/85%; 7) SAP SE ORD, 2.69%; 8) ALLIANZ SE ORD, 2.37%; 9) L OREAL S.A., 2.31%; 10) SCHNEIDER ELECTRIC SE, 2.01%.
Although there is no inclusion of any company directly engaged with sustainability or renewables, their top holdings appear to be fairly prestigious firms with relatively developed ESG frameworks and a sense of social responsibility. For example, firms like Roche and AstraZeneca have been quite active in making good societal impacts through the provision of healthcare services and medical supplies, especially during the COVID pandemic. Although the pharmaceutical industry is often criticised for having huge environmental issues, AstraZeneca is rated very high according to the CSRhub, with a score of 93 compared with over 30,000 firms. According to its 2021 sustainability report, the entity itself is on track of achieving its net zero ambition plan. In the past, Unilever has been questioned about its sustainability quite a lot, but in the 2022 Sustainalytics rating, it is considered medium risk and is ranked 9th amongst all 104 household product firms. In my opinion, this can be seen as an improvement in its ESG performance and be an indicator that it is trying to implement its sustainability and net-zero strategy. Hence, although some of the firms in the top holding list have been criticised in the past, the score of the fund in this section is not too low because improvements in ESG performances are witnessed in these firms.
This fund is built to track the MSCI Europe Low Carbon SRI Leaders Index with the use of ESG screening methodology. Building upon the MSCI Europe Index, this index essentially aims to reflect the performance of large and mid-cap companies from European developed markets, and is reviewed on a quarterly basis. In order to be eligible for inclusion in the Index, companies must be eligible for inclusion in the Parent Index and must display high ESG performance and low current and potential carbon exposure.
Two independently applied sets of rules are included in the constituent selection process: (i) Low Carbon Exposure Selection Rules assess the carbon exposure of constituents of the Parent Index and weight them accordingly, and (ii) High ESG Performance Selection Rules assess the ESG performance of constituents of the Parent Index. Companies involved in industries with a high potential for negative ESG impact such as alcohol, gambling, weapons, and tobacco are excluded from the Index. The remaining constituents of the Index are weighted accordingly. After the application of these two sets of rules, the remaining constituents are then subject to a tobacco screen, which excludes companies receiving revenue above 5% from tobacco-related products.
It can be seen from these selection criteria that ESG factors lie at the centre of their investment decisions and are incorporated throughout the screening process. In addition, the sustainability performance of the entity itself is also fairly impressive, with most scores being above the average. According to the EKPI Carbon Footprint measurement, the holdings of this fund had 76% less carbon emissions than their reference level. On an annual basis, fund holdings generated 80.3% more renewable electricity than the reference. Although some holdings come from controversial sectors such as the bio-pharma industry, the selected firms are making progress in terms of emission reduction and have been trying to contribute during the COVID pandemic. It is true that many medicines are still currently unaffordable for many households, but given the research and development cost, in my opinion, structural market change and government subsidy may play a more vital role in price reduction. Notably, another aspect in which the fund falls below average is the percentage of UNGC signatory included in the holdings, but this does not largely undermine its praiseworthy ESG performance.
This fund is a sub fund of Xtrackers (IE) Plc, which is an umbrella fund with variable share capital and segregated fund liability. Additionally, DWS Investment S.A. acts as the management company of Xtrackers (IE) plc. Hence, the financial expertise of this fund’s management should not be questioned, but this fact can weaken the credibility of its “excellent” rating in the DWS ESG assessment. Furthermore, because the asset management team is not disclosed at all, whether this fund is actually run by any ESG professional is unknown. If this information can be provided, consumer confidence may be further boosted and their efficiency in addressing ESG investment may be further assured.