Beyond Investing’s US Vegan Climate Index, a low-carbon benchmark for cruelty-free and sustainable investing, is two years old, and is celebrating the fact with an announcement that it has enjoyed outperformance versus the S&P 500 of 5.93 per cent, an annualised excess return of 2.92 per cent with a tracking error of 1.39 per cent since launch.
Beyond Investing writes that dividing the tracking error into the annualised excess return, the Information Ratio of 2.1 over this two-year period comfortably exceeds the numbers typically achieved by actively managed US mutual funds.
The VEGAN index, calculated by Solactive, screens US Large Cap stocks for vegan and environmental criteria. It is constructed primarily by excluding from the universe of the Solactive US Large Cap index (a close proxy to the S&P500 Index) any stocks whose activities are incompatible with a vegan and climate-conscious approach to investing.
The criteria for exclusion include animal testing, animal derived products, fossil fuel, human rights abuses and other factors. These exclusions remove approximately 49 per cent of the market capitalisation of the top 500 US large cap stocks.
Activities that are directly harmful to animals provoke the majority of VEGAN’s exclusions, with a third of the S&P500 Index removed for involvement in animal testing, animal-derived products or the use of animals in sport and entertainment. Extraction, combustion and financing of fossil fuel and other environmentally damaging activities cause 11.7 per cent of the S&P500 Index to be excluded. Some 3.9 per cent of the S&P500 Index conflict with its weapons and human rights policies.
The index was developed by the equity research arm of impact investing platform Beyond Investing, spearheaded by CEO and former investment analyst Claire Smith.
“Creating this Index was the first time that the proportion of the US stock market whose business models harm animals and the environment was properly identified,” says Smith. “Statistics show that 9.7 million Americans now identify as vegan and this audience is hungry for financial products which adhere to the principles that they live by, they do not want their money supporting businesses whose activities they oppose.”
The weighted average market capitalisation of the 278 companies that currently make up VEGAN – which include Google, Facebook, Microsoft, Tesla and Beyond Meat – is USD155 billion and the median market cap is USD21 billion.
Smith writes that the prevalence of the animal exploiting and environmentally damaging companies in certain industries means that the sector breakdown of VEGAN is quite different from the S&P500 Index.
“VEGAN is overweight technology, communications and financials and underweight healthcare, consumer, energy, materials and utilities, as compared to the proportions of those sectors in the S&P500 Index.
“VEGAN benefited from being overweight in technology, communications and financials, as well as its removal of energy and underweight in industrials, and these tilts compensated for it being underweight consumer stocks, healthcare and utilities.
“Generally, all of the exclusions except avoiding stocks exploiting animals in sports and entertainment were a net benefit to the portfolio, and especially large contributions came from the removal of stocks related to fossil fuel, military and defence, and animal testing.
“Despite its different composition, VEGAN has exhibited a 97.56 per cent correlation with the S&P500 Index on a price return basis, meaning that VEGAN moves in the same direction as the S&P500 Index 97.56 per cent of the time. Its Beta since inception has been 1.06, lower than might be expected given the high technology component,” Smith says.
Since its launch, VEGAN has exhibited lower carbon, waste and water footprints per unit of revenue versus the S&P500 Index and most ESG indexes, she writes.
“VEGAN’s carbon footprint is just 23 per cent of the S&P500 Index, emphasising its climate commitment, and altogether the companies in VEGAN use 93 per cent less water and generate 96 per cent less waste as compared to the constituents of the S&P500 Index.”
Finally, Smith notes that mapping the Index exposures to United Nations Sustainable Development Goals reveals a higher exposure to environmentally and socially beneficial industries and zero exposure to environmentally and socially harmful industries, using analysis supplied by Impact-Cubed.
Claire Smith made a presentation at the etfLIVE Europe Digital Summit 2020.
