ESG investing is the talk of the town. Suddenly, a lot of people with money to invest want to be not just richer but also kinder to the planet. Unsurprisingly, options for investing in so-called green businesses and projects are popping up like mushrooms after a rain. The question is, are people actually investing in them?
The abbreviation ESG refers to environmental, social, and governance: three aspects of any business that the new class of concerned investors has prioritized. In actuality, a lot of so-called ESG investment options focus on the E part of the abbreviation, with investment focusing on renewable energy companies, for example, or companies that have pledged to decarbonize.
Fidelity Investments, one of the world’s largest investment fund managers, just this month launched not one but three ESG mutual funds and one exchange-traded fund. With them, Fidelity’s total ESG fund lineup has reached 15.
And Fidelity is far from the only one. Fellow investment giant Amundi recently added a new ESG fund to its lineup for the United States, dubbed the Pioneer Global Sustainable Equity Fund. Blackrock, the world’s largest asset manager, has half a dozen ESG funds. Vanguard has more. ESG funds—mutual or exchange-traded, passive, active or a combination of both—are the way of the future, it seems.
Or are they?
The Financial Times reported this week that an ESG exchange-traded fund backed by none other than the United Nations itself was about to fold. The reason: lack of investments. The fund, MSCI Global Climate Select, had only attracted less than $2 million in investments.
The fund excluded fossil fuel companies, as every ESG fund does, and focused on companies with low emissions. The top 10 holdings in its portfolio included Tesla, Apple, Microsoft, and Alphabet, the parent company of Google. And yet the fund manager plans to shut it down by next month because nobody wants to invest in it, including top Wall Street banks that had pledged seed money for the ETF.
Perhaps the fund is failing because there is already quite an extensive choice of ETFs focusing on low-emission and non-fossil fuel businesses. Perhaps the reasons for the fund’s failure are more complex. The fact remains that banks that had promised to pump money into it have not done so.
According to the banks themselves, as cited by the FT in its report, their pledges for seed money were contingent on other investors joining the fund, too. Some of them, including Citi and Bank of America, said that their investment commitments include a provision that their holdings in the fund do not exceed 25 percent of its total size, which was impossible when its total size was $2 million and their pledges were, respectively, up to $50 million and $12.5 million.
One other interesting fact is that the banks that had pledged that money were all members of the Global Investors for Sustainable Development Alliance, a group of 30 companies aiming to support the United Nation’s climate targets financially. Worth some $16 trillion in combined assets, members of the alliance include, besides BofA and Citi, Calpers, Pimco, UBS, Standard Chartered, and insurance giant Allianz.
The most interesting part of the mystery is, in fact, the portfolios of those funds. Their creators say they are made up of environmentally, socially and governance-wise responsible businesses. A quick check shows that at least some of these funds are simply ETFs like all others, except they don’t include traditional energy stocks.
Take, for example, Vanguard’s ESG U.S. Stock ETF. Its top ten holdings include, in descending order, Apple, Microsoft, Alphabet, Amazon, and Tesla as its top-five holdings.
Fidelity’s Sustainable Multi Asset Income Fund includes LVMH, Moet Hennesy, Procter & Gamble, Johnson & Johnson, a wind power investment company—Greencoat UK Wind—and, interestingly, Chinese government bonds.
Now, since ESG funds prioritize emissions-cutting efforts and, to a somewhat lesser extent, work to improve social and governance track records, one might assume that all these companies have made commitments to that effect or are already working on these issues.
The tech giants, for instance, are a safe bet for ESG fund managers because they have made huge and very vocal commitments to emission reductions and renewable power purchases. So are other huge corporations simply because they are in the spotlight. But does this mean they are actually going to stick to these commitments? This is where things get really interesting and quite confusing.
The issue of ESG performance measurement has been drawing growing attention because there is no standard way to measure how companies that have made climate-related commitments are actually working towards these goals. “Greenwashing” is popping up in more and more headlines, with activists accusing corporates of making empty promises and then continuing to do business as usual to the detriment of the planet.
ESG investing, then, is in murky waters right now. Appetite is growing, and so is supply, but you can never be sure if the ETF you are putting your hard-earned money in to make the world a better place is, in fact, made up of companies that are serious about cutting their emissions or just going through the motions to please investors and keep them on board. Perhaps this is why the UN-backed ETF failed. Perhaps it will not be the only one.
By Irina Slav for Oilprice.com
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