Boosting the ESG Focus of Our Ex-State-Owned Enterprises Strategies

Head of Indexes, U.S.
Associate Director, Research

WisdomTree’s family of ex-state-owned enterprises (ex-SOE) Indexes was designed to represent the performance of emerging markets companies without significant government ownership—which we define as a 20% or more stock ownership stake.

As a result of this state-ownership screening, there were explicit tilts away from poor corporate governance companies and implicit tilts away from companies that score poorly on environmental considerations:

  • “G” in ESG – Selecting only private enterprises explicitly mitigates exposure to the governance issues related to state-owned enterprises.
  • “E” in ESG – These Indexes tended to reduce weight to sectors that score poorly on environmental concerns because of the high degree of state ownership in Energy and Materials businesses—this created an implicit environmental tilt.

Based on these tilts, the WisdomTree Emerging Markets ex-State-Owned Enterprises Fund (XSOE) was named the 2019 Mutual Fund Industry & ETF Awards’ ESG/Impact ETF of the Year.1

WisdomTree believes these Funds already represented best-in-class ESG solutions due to their performance-driven methodologies. But to further solidify their ESG credentials, we added some more considerations. 

Focus on Governance

Screening out state-owned enterprises (SOEs) from our starting universe explicitly improves aggregate governance, as it removes the inherent principal-agent problem detailed below.

Governance Image

A common criticism of SOEs is that political influences force them to employ too many people and pay above-market wages. A real-life example of the principal-agent problem can be seen by contrasting the per-employee revenue numbers of two comparable energy companies: state-owned PetroChina and privately held Exxon Mobil.

Over the past few years, the Chinese government has praised PetroChina for creating jobs despite falling oil prices and the meltdown of the global economy due to the COVID-19 pandemic.2 As seen below, Exxon Mobil generated roughly $2.76 million in revenue per employee—almost seven times as much as the $0.42 million generated by PetroChina in 2016.

Figure 1_Revenue Per employee

Implicitly Improving Environmental Exposures

State-owned enterprises tend to be clustered in Financials, Energy, Materials and Utilities. By screening out SOEs, WisdomTree’s ex-SOE Indexes implicitly screen on environmental considerations by removing exposure to Energy and Materials companies. Some of the largest SOEs in the MSCI Emerging Markets Index’s universe include Energy and Materials companies like Vale, Petroleo Brasileiro (i.e., Petrobras) and Gazprom.

Figure 2_XSOE weights

Additional ESG Considerations

As additional ESG considerations to the current methodology of its ex-SOE Indexes, WisdomTree will exclude companies involved in controversial weapons, tobacco or thermal coal activities or that are noncompliant with the Global Standards Screening (GSS), as identified by third-party ESG data provider Sustainalytics, from the strategies’ eligible universes.

Sustainability Info

WisdomTree applied these changes to all its ex-SOE Indexes on January 25 of this year. The broad Emerging Market ex-State-Owned Enterprises Index (EMXSOE) dropped a total of 14 companies, representing 1.57% of its weight. The relatively modest additional impact of the new ESG screens was by design given the environmental and governance considerations already inherent in the strategy. 

The India ex-State-Owned Enterprises Index (INXSOE) had five companies excluded, totaling 7.65% of Index weight. China ex-State-Owned Enterprises Index (CHXSOE) had no additional companies screened.

Figure 3_XSOE weights_1


At a time when many investors are concerned about the ESG characteristics of their portfolios, WisdomTree believes screening SOEs from a broad emerging market universe provides investors with a portfolio with strong governance and environmental characteristics. Adding more  ESG screens on product involvement and noncompliance to GSS further enhances these portfolios.

For those investors looking to add emerging markets exposure to their portfolios, this family of ex-state-owned enterprises strategies can provide the right combination of long-term returns and sustainable exposures.



1This award is given to the most successful ETF focused on issues related to environmental, social and governance factors or specific ESG objectives. Success is determined by a combination of several factors, such as flows, performance and innovation. The finalists are comprised of individuals and firms who have submitted entries or been nominated via the online submission process, as well as through recommendations from leading market participants. Judges will use the submitted application material, as well as any uploaded supplemental information, to determine which firm, individual or product they believe to be the most suitable and deserving winners for each category.
2“The new state capitalism: Xi Jinping is trying to remake the Chinese economy,” The Economist, 8/15/20.

Important Risks Related to this Article

There are risks associated with investing, including possible loss of principal. Foreign investing involves special risks, such as risk of loss from currency fluctuation or political or economic uncertainty. Investments in emerging or offshore markets are generally less liquid and less efficient than investments in developed markets and are subject to additional risks, such as risks of adverse governmental regulation and intervention or political developments. Funds focusing their investments on certain sectors and/or regions increase their vulnerability to any single economic or regulatory development. This may result in greater share price volatility. Investments in currency involve additional special risks, such as credit risk and interest rate fluctuations. The Fund invests in the securities included in, or representative of, its Index regardless of their investment merit, and the Fund does not attempt to outperform its Index or take defensive positions in declining markets. Please read the Fund’s prospectus for specific details regarding the Fund’s risk profile.

References to specific securities and their issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities.

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About the Contributors
Head of Indexes, U.S.

Alejandro Saltiel joined WisdomTree in May 2017 as part of the Quantitative Research team. Alejandro oversees the firm’s Equity indexes and actively managed ETFs. He is also involved in the design and analysis of new and existing strategies. Alejandro leads the quantitative analysis efforts across equities and alternatives and contributes to the firm’s website tools and model portfolio infrastructure. Prior to joining WisdomTree, Alejandro worked at HSBC Asset Management’s Mexico City office as Portfolio Manager for multi-asset mutual funds. Alejandro received his Master’s in Financial Engineering degree from Columbia University in 2017 and a Bachelor’s in Engineering degree from the Instituto Tecnológico Autónomo de México (ITAM) in 2010. He is a holder of the Chartered Financial Analyst designation.

Associate Director, Research
Matt Wagner joined WisdomTree in May 2017 as an Analyst on the Research team. In his current role as an Associate Director, he supports the creation, maintenance, and reconstitution of our indexes and actively managed ETFs. Matt started his career at Morgan Stanley, working as an analyst in Treasury Capital Markets from 2015 to 2017 where he focused on unsecured funding planning, execution and risk management. Matt graduated from Boston College in 2015 with a B.A. in International Studies with a concentration in Economics. In 2020, he earned a Certificate in Advanced Valuation from NYU Stern. Matt is a holder of the Chartered Financial Analyst designation.