ESG ETF Options Available to South African Investors

# ESG ETF Options Available to South African Investors

By Lona Matshingana 

## Understanding ESG Investing

ESG stands for Environmental, Social, and Governance—three pillars used to evaluate the sustainability and ethical impact of investments. Environmental factors include carbon emissions, renewable energy use, and climate change mitigation. Social criteria examine labor practices, diversity, human rights, and community engagement. Governance relates to leadership quality, executive compensation, transparency, and shareholder rights.

An ESG ETF is an exchange-traded fund that invests in companies based on their ESG credentials. These funds track indices constructed using ESG screening methodologies, which may exclude controversial sectors like tobacco or fossil fuels, select high-ESG-rated companies, or tilt portfolios toward firms with superior ESG performance. Like traditional ETFs, they offer diversification, liquidity, and lower fees while aligning capital with values-based objectives.

## Available Options in South Africa

The Johannesburg Stock Exchange became the first South African exchange to list global ESG-focused ETFs in September 2020, making sustainable investing more accessible to local investors. Three primary options currently exist:

**Satrix MSCI World ESG Enhanced ETF (STXESG)** tracks the MSCI World ESG Enhanced Focus CTB Index, providing developed market exposure with favorable ESG characteristics. This feeder fund invests in the underlying iShares MSCI World ESG Enhanced UCITS ETF, offering rand-denominated access to a globally diversified portfolio across the United States, Japan, the United Kingdom, and Europe. Typical holdings include technology companies with environmental commitments, healthcare firms with positive social impacts, and financial institutions with robust governance. Companies involved in thermal coal or tobacco are typically excluded.

**Satrix MSCI Emerging Markets ESG Enhanced ETF (STXEME)** provides emerging market equity exposure filtered through an ESG lens. This fund tracks the MSCI Emerging Markets ESG Enhanced Focus CTB Index, applying ESG methodologies to companies in developing economies across Asia, Latin America, and other regions. Holdings might include Chinese technology companies with environmental initiatives, Indian pharmaceutical firms providing affordable medicines, or Latin American financial institutions promoting financial inclusion.

**Reitway Global Property ESG Prescient ETF**, listed in June 2023, offers sector-specific ESG investing focused on global real estate investment trusts. The fund tracks the Reitway Global Property ESG Index, selecting property companies based on energy efficiency, green building certifications, tenant wellbeing, and governance quality. Holdings typically include LEED-certified office buildings, energy-efficient residential properties, and logistics facilities powered by renewable energy.

## The South African Context

South Africa's concentrated equity market presents unique challenges for domestic ESG investing. The JSE is dominated by a small number of large companies in sectors facing ESG scrutiny—mining, fossil fuel energy, and finance. Strict ESG screening of the limited JSE universe would create an extremely narrow investment base, sacrificing diversification. This explains why available ESG ETFs focus on global rather than domestic markets.

For domestic exposure, investors can reference the FTSE/JSE Responsible Investment Index, which benchmarks JSE-listed companies meeting certain ESG criteria and addresses local priorities like transformation and community development.

## Practical Considerations

South African investors should understand the specific ESG methodology employed, as different approaches yield different portfolios. While ESG ETFs may carry slightly higher fees than broad market ETFs due to ESG research costs, the Satrix products remain competitive. These ETFs are eligible for Tax-Free Savings Accounts, making them attractive for long-term wealth building without dividend withholding or capital gains tax.

Currency considerations matter since these ETFs invest globally, providing hedging against rand depreciation but also exposure to currency volatility.

## Conclusion

ESG ETFs make sustainable investing accessible to South African investors. While current options focus on global markets, the Satrix and Reitway products provide credible pathways for aligning portfolios with ESG values while maintaining diversification and cost efficiency, serving both financial objectives and broader societal goals.

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