Morningstar - Q4 2020 - 25

Dispatches

Relative to the MSCI Emerging Markets Index,
overweighting financials and underweighting
technology are notable. As an example,
the MSCI Emerging Markets SRI 5% Index had
a financials overweight of 11.4 percentage
points and a tech underweight of 12 points at
the end of June.
Financials are the largest sector allocation in
emerging markets at 19%, and two of the
strategies build on this by bringing the allocations
to over 30%. In the case of both the SRI and SRI
Leaders strategies, tech is cut to single digits,
reflecting the unimpressive sustainability profiles
of companies in that sector. Unsurprisingly,
Emerging Markets SRI Select Reduced Fossil Fuels
has a five percentage point underweight in
energy-a direct result of its climate-changebased exclusion criteria.
Country-specific risk is a major contributor
to returns, particularly within emerging markets,
which are more likely to experience political
instability or currency fluctuations. For this reason,
country allocation differences will be an important
long-term driver of performance deviations.
China is the largest allocation in most emergingmarkets indexes and a growth stalwart.
An underweighting there will be a major source
of active risk for investors who want to improve
their portfolio's overall sustainability profile.
The stricter SRI strategies have less than half the
MSCI Emerging Market Index's stake in China,
owing to the low ESG scores awarded to Chinese
firms and the 5% individual stock cap that
disproportionately impacts the larger stocks in an
index, many of which are Chinese. Countries
with higher ESG scores, such as South Africa and
Brazil, are overrepresented.

Emerging-Markets ETFs With ESG Screens These variations on the MSCI Emerging
Markets Index have different sustainability profiles.
Fund

Benchmark

Morningstar
Morningstar
Sustainability
Analyst Rating Rating

iShares MSCI EM SRI ETF

MSCI EM SRI Select Reduced Fossil Fuels

´

'''''

iShares MSCI EM IMI ESG Scrn ETF MSCI EM IMI ESG Screened

´

'''

UBS ETF MSCI Emerging Mkts SRI

MSCI EM SRI 5% Issuer Capped

´

''''

Xtrackers MSCI Em Mkt ESG ETF

MSCI EM Low Carbon SRI Leaders

‰

''''

Source: Morningstar. Data as of 09/30/2020.

Financials and Technology Diverge Sector weights are +/- percentage points
relative to the MSCI Emerging Markets Index.
< -10.0
Sector

Briegel Leitao is an associate analyst, European passive
fund research, with Morningstar.

MSCI Emerging
Markets %

-0.1 to -5.0

MSCI EM
IMI ESG Scrnd

0.1 to 5.0

MSCI EM Low
Carbon SRI Ldrs

5.0 to 10.0

> 10.0

MSCI EM MSCI EM SRI Slct
SRI 5% Rdcd Fossil Fuels

y Financials

19.1

-0.3

+2.5

+11.4

+15.0

t Consumer Cyclical

17.4

+0.9

+8.2

+2.6

+0.7

a Technology

16.9

+0.1

-8.4

-12.0

-12.4

i Telecommunications

13.5

-0.4

+4.3

-3.8

-1.6

r Basic Materials

6.9

-0.6

-2.1

-0.5

+0.4

s Consumer Defensive

6.5

-0.3

-1.4

+4.0

+4.1

o Energy

6.0

-1.3

-0.6

-1.3

-5.1

p Industrials

4.7

+0.8

-1.1

+0.8

+0.3

d Healthcare

4.3

+0.9

+0.2

+0.6

+0.9

u Real Estate

2.6

+0.6

-1.1

-1.2

-1.0

f Utilities

2.3

-0.6

-0.6

-0.8

-1.4

Source: Morningstar Direct. Data as of 06/30/2020.

ESG Screens Skew China Stakes Country weights are +/- percentage points
relative to the MSCI Emerging Markets Index.
Country

Conversely, the MSCI Emerging Markets Low
Carbon SRI Leaders benchmark recently had a
6-percentage-point overweight in China.
Meanwhile, as of June, the top 10 constituents
accounted for 40% of assets. Strategies that
track this benchmark carry heavy risks that will
make them unviable for some investors.

-5.1 to -9.9

MSCI Emerging
Markets %

MSCI EM
IMI ESG Scrnd

MSCI EM Low
Carbon SRI Ldrs

MSCI EM
SRI 5%

MSCI EM SRI Slct
Rdcd Fossil Fuels

China

41.0

-1.9

+5.8

-26.3

-27.3

Taiwan

12.3

+1.7

-3.9

+3.2

+3.1

South Korea

11.6

+0.8

-4.4

+1.8

+0.6

India

8.0

+0.2

+3.1

+2.0

+2.6

Brazil

5.1

-0.8

+0.2

+4.3

+5.5

South Africa

4.0

-0.2

+2.0

+6.5

+6.7

Other

18.1

+0.2

-2.9

+8.5

+8.8

Source: Morningstar Direct. Data as of 06/30/2020.

morningstar.com/lp/magazine

25


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Morningstar - Q4 2020

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Morningstar - Q4 2020 - CT1
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Morningstar - Q4 2020 - Cover1
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Morningstar - Q4 2020 - Contents
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