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
Industry weights – FTSE Australia 300 benchmark vs FTSE Australia 300 Choice Index
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
© 2022 London Stock Exchange Group plc and its applicable group undertakings (the “LSE Group”). The LSE Group includes (1) FTSE International Limited (“FTSE”), (2) Frank Russell Company (“Russell”), (3) FTSE Global Debt Capital Markets Inc. and FTSE Global Debt Capital Markets Limited (together, “FTSE Canada”), (4) FTSE Fixed Income Europe Limited (“FTSE FI Europe”), (5) FTSE Fixed Income LLC (“FTSE FI”), (6) The Yield Book Inc (“YB”) and (7) Beyond Ratings SAS (“BR”). All rights reserved.
FTSE Russell® is a trading name of FTSE, Russell, FTSE Canada, FTSE FI, FTSE FI Europe, YB and BR. “FTSE®”, “Russell®”, “FTSE Russell®”, “FTSE4Good®”, “ICB®”, “The Yield Book®”, “Beyond Ratings®” and all other trademarks and service marks used herein (whether registered or unregistered) are trademarks and / or service marks owned or licensed by the applicable member of the LSE Group or their respective licensors and are owned, or used under license, by FTSE, Russell, FTSE Canada, FTSE FI, FTSE FI Europe, YB or BR. FTSE International Limited is authorized and regulated by the Financial Conduct Authority as a benchmark administrator.
All information is provided for information purposes only. All information and data contained in this publication is obtained by the LSE Group, from sources believed by it to be accurate and reliable. Because of the possibility of human and mechanical error as well as other factors, however, such information and data is provided “as is” without warranty of any kind. No member of the LSE Group nor their respective directors, officers, employees, partners or licensors make any claim, prediction, warranty or representation whatsoever, expressly or impliedly, either as to the accuracy, timeliness, completeness, merchantability of any information or of results to be obtained from the use of FTSE Russell products, including but not limited to indexes, data and analytics, or the fitness or suitability of the FTSE Russell products for any particular purpose to which they might be put. Any representation of historical data accessible through FTSE Russell products is provided for information purposes only and is not a reliable indicator of future performance.
No responsibility or liability may be accepted by any member of the LSE Group nor their respective directors, officers, employees, partners or licensors for (A) any loss or damage in whole or in part caused by, resulting from, or relating to any error (negligent or otherwise) or other circumstance involved in procuring, collecting, compiling, interpreting, analyzing, editing, transcribing, transmitting, communicating or delivering any such information or data or from use of this document or links to this document or (B) any direct, indirect, special, consequential or incidental damages whatsoever, even if any member of the LSE Group is advised in advance of the possibility of such damages, resulting from the use of, or inability to use, such information.
No member of the LSE Group nor their respective directors, officers, employees, partners or licensors provide investment advice and nothing in this document should be taken as constituting financial or investment advice. No member of the LSE Group nor their respective directors, officers, employees, partners or licensors make any representation regarding the advisability of investing in any asset or whether such investment creates any legal or compliance risks for the investor. A decision to invest in any such asset should not be made in reliance on any information herein. Indexes cannot be invested in directly. Inclusion of an asset in an index is not a recommendation to buy, sell or hold that asset nor confirmation that any particular investor may legally buy, sell or hold the asset or an index containing the asset. The general information contained in this publication should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional.
Past performance is no guarantee of future results. Charts and graphs are provided for illustrative purposes only. Index returns shown may not represent the results of the actual trading of investable assets. Certain returns shown may reflect back-tested performance. All performance presented prior to the index inception date is back-tested performance. Back-tested performance is not actual performance, but is hypothetical. The back-test calculations are based on the same methodology that was in effect when the index was officially launched. However, back-tested data may reflect the application of the index methodology with the benefit of hindsight, and the historical calculations of an index may change from month to month based on revisions to the underlying economic data used in the calculation of the index.
This document may contain forward-looking assessments. These are based upon a number of assumptions concerning future conditions that ultimately may prove to be inaccurate. Such forward-looking assessments are subject to risks and uncertainties and may be affected by various factors that may cause actual results to differ materially. No member of the LSE Group nor their licensors assume any duty to and do not undertake to update forward-looking assessments.
No part of this information may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission of the applicable member of the LSE Group. Use and distribution of the LSE Group data requires a license from FTSE, Russell, FTSE Canada, FTSE FI, FTSE FI Europe, YB, BR and / or their respective licensors.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.