Blog by John Fleetwood – August 2018


The rise and rise of exchange traded funds have been well documented.

Low management costs and evidence that the performance of actively managed funds may not justify the extra costs are compelling reasons for using passive funds. In particular, the model portfolios used by robo advisers are exclusively comprised of passive funds.  Until now, none of these offered socially responsible options, but robo adviser, Wealth Simple, has recently launched an SRI Portfolio that promises that an investor “can be well diversified while helping to build the world you want”.  So how well can it deliver on those promises?

Wealth Simple offer three SRI portfolios, all investing in the same five ETFs, but in different proportions.  These include the following funds:

ZFM – Canadian Federal bonds

VIDI – Global equities screened on human rights and corruption criteria

PZD – Global clean technology equities

CRBN – Global equities with a lower carbon footprint than the wider market

XEN – Canadian equities that Wealth Simple claim to “prioritize environmental and social concerns”

The Wealth Simple Balanced SRI Portfolio

This all sounds well and good, but is it? We’ve taken a look at the holdings of each of these funds to see how reality matches up with the marketing.

CRBN – The stocks may have a lower carbon footprint than the wider market but it invests in tobacco, oil exploration and production, mining and Genetic modification.

PZD – The fund does indeed invest in clean technology companies providing environmental solutions, so fully justifies the Cleantech classification.

VIDI – Similarly this fund may screen holdings on human rights, but it invests in coal, oil (including Russia) and mining; all highly contentious areas with high negative environmental impacts.

XEN – The actual objective of the fund is to invest in Canadian companies that meet a broad set of ESG criteria.  These seem not to exclude several controversial areas as the fund invests in the highly damaging production of oil from tar sands as well as other oil exploration and mining companies.  To classify this fund as “Environment” therefore seems to be stretching the definition.

ZFM – The fund invests in debt issued by the Canadian government.

This rather illustrates the pitfalls of investing in ETFs employing environmental and social governance (ESG) criteria. Many focus on specific themes or criteria, and most investors wanting to adopt an ESG strategy don’t want to treat issues in isolation. If you are concerned about human rights, equal opportunities, or climate change, you’ll want all of the constituent funds to pay attention to these issues, not just one token fund.  Secondly it’s rather misleading to classify a fund under the ‘Environment’ banner when it actually follows broad ESG criteria that permit investment in environmentally destructive activities such as tar sands.  Furthermore, many other ETFs following ESG strategies employ such broad criteria that they become pretty meaningless.

There’s also a wider issue in that passive investing is just that – passive. By and large, it doesn’t seek to effect change by engaging with companies on ESG issues, and doesn’t report on impacts.  This is a critical part of bringing about positive change and requires specialist teams that carry a financial cost that is unlikely to be absorbed by funds that rely on being lean and cost effective.  There may be a place for very tightly defined thematic ETFs, but these tend to form the periphery of a balanced portfolio.  In our view, socially responsible portfolios solely using passive funds are a bit of an oxymoron. It’s a bit like fully relying on a discount supermarket for your organic, fairly traded, environmentally friendly, high animal welfare produce. You might find a few items, but you’re unlikely to find everything you need, or to be as assured of standards across the board.

It will come as little surprise that the Positive Pennine Portfolios don’t currently invest in ETFs, ensuring that investors can benefit from specialist management and active engagement.

These are the opinions of John Fleetwood and do not necessarily reflect those of Pennine Wealth Solutions.