Part 2: Aligning Portfolios With ESG Values ​​In Australia – An Industry View

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By Mark Barnes, PhD, head of investment research (Americas)

In Part 1 of our blog series highlighting the findings of our Australia Global Choice research paper, we focused on the performance of an index-based solution employing a rigorous, rules-based ESG-centric screening and exclusion process. Here, we show the impact of that process in more detail, again using the FTSE Australia 300 Choice index to illustrate.

The results are intuitive in that the screening can have a significant impact on the specific industries or sectors directly associated with excluded products and activities, but the overall composition of the index is not greatly changed.

While this process varies across the Global Choice index suite, the FTSE Australia 300 Choice Index excludes stocks using the entire suite of product- and conduct-related screens, except those for Diversity. These range from such vice products as gambling and tobacco and weapons manufacturing to governance issues such as a company’s anti-corruption policies and procedures, as detailed in our research paper.

As shown in the two charts that follow, while the number of stocks across industries in the Australia 300 Choice index (light blue bars) is below that of the benchmark (black bars), industry weights were fairly similar between the two indices.

Number of stocks – FTSE Australia 300 benchmark vs FTSE Australia 300 Choice Index

Aligning portfolios with ESG

FTSE Russell. Based on Industry Classification Benchmark (NYSE: ICB) monthly return data from April 1, 2015, through March 31, 2021. Past performance is no guarantee of future results. Please see end for important legal disclosures.

Industry weights – FTSE Australia 300 benchmark vs FTSE Australia 300 Choice Index

Aligning portfolios with ESG

FTSE Russell. Based on Industry Classification Benchmark (ICB) monthly return data from April 1, 2015, through March 31, 2021. Past performance is no guarantee of future results. Please see end for important legal disclosures.

As expected, the biggest changes were in industries most closely related to the excluded products. For example, all 15 Energy stocks were excluded, so the Energy industry ended up with no weight. This occurred because all of the stocks in the industry were in the Oil, Gas and Coal sector, while the benchmark had no stocks in the Alternative Energy sector. Of course, some industry weights will rise: the Australia 300 Choice exposures to Financials, Health Care, Industrials, and Real Estate increased modestly versus those of the benchmark.

While the entire Energy industry was eliminated by the screening, it started with a relatively small weight of 3.9% in the benchmark. An industry that saw a bigger decrease was Basic Materials, which is dominated by the Industrial Metals and Mining sector. The Choice screening removed 10 of the 32 stocks in that sector, including some large stocks such as BHP Group, Rio Tinto Ltd. and South32.

Weights and number of stocks – Basic Materials sectors, before and after exclusions

Aligning portfolios with ESG

FTSE Russell. Based on Industry Classification Benchmark (ICB) monthly return data from April 1, 2015, through March 31, 2021. Past performance is no guarantee of future results. Please see end for important legal disclosures.

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Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.



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