Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 365

Wirecard shows not all ethical ETFs pass the smell test

Last week, German payments giant Wirecard filed for insolvency, owing creditors almost $5.8 billion. The company’s collapse came a week after its auditor, Ernst and Young (EY), found a massive $3.1 billion hole in its books. EY refused to sign off on the company’s 2019 accounts, saying there were indications of an “elaborate and sophisticated fraud involving multiple parties around the world”.

Markus Braun, the firm’s CEO, resigned and was subsequently arrested on suspicion of misrepresenting the firm’s finances.

Wirecard’s implosion is a stunning fall from grace for a company that was once seen as a champion of the European technology industry. So how is the demise of a German fintech company relevant to Australian investors?

While it’s likely that relatively few Australian investors will have had direct exposure to Wirecard, it’s possible that significantly more had exposure via a managed fund or ETF. The holders of broad sharemarket funds may be relatively sanguine about an event such as this, accepting that broad sharemarket exposure inevitably involves ‘taking the bad with the good’.

However, for one rapidly-growing class of people, investing their money in businesses whose environmental, social and governance (ESG) standards are beyond reproach is non-negotiable. For these investors, a true-to-label ethical exposure is one of the most important factors to be considered in their investment choices.

What do we know about Wirecard?

Wirecard offers products and services in the areas of mobile payments, e-commerce, digitisation and finance technology. It is also one of the popular options consumers can use to gamble online. Once an account is set up with Wirecard, it can be loaded with funds from a credit or debit card, or from a bank account. Account holders can use Wirecard to move money to and from online casinos, without having to disclose their banking information.

In a report by the Financial Times, Wirecard acknowledged that up to 10% of its payment volumes “relate to lottery, gambling, dating, adult entertainment and associated business models”.

In its Responsible Investment Benchmark Report 2019, the Responsible Investment Association Australasia (RIAA) found that 82% of the responsible investment managers surveyed said they screened investments for gambling (see figure below).

Source: Responsible Investment Benchmark Report 2019, RIAA.

True-to-label ethical exposure?

For investors who are concerned about the true-to-label exposure of their ethical investments, it’s essential to have confidence that an ethical fund is screening out investments that do not align with their values.

Our global equities-focused ethical ETF (ASX:ETHI) aims to track an index that applies limits to the percentage of a company’s revenue that can be derived from activities deemed inconsistent with responsible investment considerations. These exposure limit guidelines include a limit of 0% for casinos and manufacture of gaming products and 5% for distribution of gambling products.

Due to its involvement in gambling, Wirecard did not pass ETHI’s index screening process and was not included in its portfolio. It was estimated that well over 5% of Wirecard’s revenue was derived from providing payment services to online gambling, poker tournaments, and sports betting platforms.

Wirecard was also excluded from other ASX-traded ethical ETFs, but not all.

The performance of a number of ethical equity-focused ETFs has been strong, inclduing ETHI. However, we believe that one of the primary reasons that investors (both institutional and individual) have favoured our ethical funds is the integrity and quality of the investment methodology our funds employ.

In addition, the Betashares Responsible Investment Committee may, applying the ESG-related screening criteria, exclude a company exposed to significant ESG-related reputational risk or controversy, if it considers that its inclusion would be inconsistent with the values of the underlying index.

The strictness of screening processes can vary between ethical ETFs, and many ethical ETFs rely on off-the-shelf indices without additional oversight. This can result in stock inclusions that may not pass the ethical ‘smell test’ and would be out of place for many investors seeking an ethical exposure.

For example, the French beauty giant L’Oréal is currently a constituent in some ethical ETFs trading on the ASX. This company conducts animal testing for cosmetic purposes and has received a “Fail” grade from the influential Ethical Consumer Guide. L’Oréal was screened out of ETHI’s portfolio based upon its record on animal welfare.

In the last two years, other stocks screened out of ETHI but included in the portfolios of other ethical ETFs traded on the ASX include Halliburton, Schlumberger, Barrick Gold, Valero and Kering. We believe ethical investors may not be comfortable with these companies for reasons such as environmental degradation, fossil fuel exposure, animal cruelty, junk food, bribery, fraud, tax evasion and breaking trade sanctions.

Not all ethical funds are created equally

The Wirecard episode demonstrates the importance of understanding what lies ‘under the hood’ of an ethical ETF. There can be significant differences between fund methodologies, and as a consequence, in the ability of different funds to deliver on their promise of offering ethically screened portfolios that align with the values of ethical investors.

 

Richard Montgomery is the Marketing Communications Manager at BetaShares, a sponsor of Firstlinks. This article is for general information purposes only and does not address the needs of any individual. Past performance is not indicative of future performance. Investment value can go down as well as up.

For more articles and papers from BetaShares, please click here.

*ETHI is certified by RIAA according to the strict operational and disclosure practices required under the Responsible Investment Certification Program. The Responsible Investment Certification Program does not constitute financial product advice. Neither the Certification Symbol nor RIAA recommends to any person that any financial product is a suitable investment or that returns are guaranteed. Appropriate professional advice should be sought prior to making an investment decision. RIAA does not hold an Australian Financial Services Licence. www.responsibleinvestment.org.

 


 

Leave a Comment:

     

RELATED ARTICLES

The rise of socially responsible investing

Discovering the good and the bad among ethical ETFs

Four reasons ESG investing continues to grow

banner

Most viewed in recent weeks

Is it better to rent or own a home under the age pension?

With 62% of Australians aged 65 and over relying at least partially on the age pension, are they better off owning their home or renting? There is an extra pension asset allowance for those not owning a home.

Too many retirees miss out on this valuable super fund benefit

With 700 Australians retiring every day, retirement income solutions are more important than ever. Why do millions of retirees eligible for a more tax-efficient pension account hold money in accumulation?

Reece Birtles on selecting stocks for income in retirement

Equity investing comes with volatility that makes many retirees uncomfortable. A focus on income which is less volatile than share prices, and quality companies delivering robust earnings, offers more reassurance.

Is the fossil fuel narrative simply too convenient?

A fund manager argues it is immoral to deny poor countries access to relatively cheap energy from fossil fuels. Wealthy countries must recognise the transition is a multi-decade challenge and continue to invest.

Superannuation: a 30+ year journey but now stop fiddling

Few people have been closer to superannuation policy over the years than Noel Whittaker, especially when he established his eponymous financial planning business. He takes us on a quick guided tour.

Anton in 2006 v 2022, it's deja vu (all over again)

What was bothering markets in 2006? Try the end of cheap money, bond yields rising, high energy prices and record high commodity prices feeding inflation. Who says these are 'unprecedented' times? It's 2006 v 2022.

Latest Updates

Retirement

How to enjoy your retirement

Amid thousands of comments, tips include developing interests to keep occupied, planning in advance to have enough money, staying connected with friends and communities ... should you defer retirement or just do it?

Retirement

Results from our retirement experiences survey

Retirement is a good experience if you plan for it and manage your time, but freedom from money worries is key. Many retirees enjoy managing their money but SMSFs are not for everyone. Each retirement is different.

Interviews

Why short-termism is both a travesty and an opportunity

On any given day, whether the stockmarket rises or falls is a coin toss, but stay invested for 10 years and the odds are excellent. It's at times of market selloffs that opportunities present for long-term investors.

Investment strategies

Fear is good if you are not part of the herd

If you feel fear when the market loses its head, you become part of the herd. Develop habits to embrace the fear. Identify the cause, decide if you need to take action and own the result without looking back. 

No excuses: Plan now for recession

The signs of a coming recession are building, especially in the US. In personal and business decisions, it's time to be more conservative and engage in risk management until some of the uncertainty is resolved. 

Strategy

The fall of Volt Bank removes another bank competitor

The startup banks were supposed to challenge the lazy, oligopolistic major banks, but 86 400, Xinja and now Volt have gone. Why did Volt disappear so quickly when it had gained deposit support and name recognition?

Strategy

Three main challenges to online ads and ‘surveillance capitalism’

Surveillance capitalism refers to the collection and use of consumer data to further profits. Will a renewed focus on privacy change the online-ad business model, or is it too entrenched?

Sponsors

Alliances

© 2022 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.