Are ESG funds really popular?
ESG investing is the talk of the town. Suddenly, many people who have money to invest want to be not only richer but also kinder to the planet. Unsurprisingly, investment options in so-called green businesses and projects are springing up like mushrooms after the rain. The question is, are people actually investing in it?
The abbreviation ESG refers to environmental, social and governance: three aspects of any company to which the new class of concerned investors has given priority. In fact, many so-called ESG investment options focus on the E part of the abbreviation, with investments focused on renewable energy companies, for example, or companies that have committed to decarbonizing.
Fidelity Investments, one of the world’s largest investment fund managers, launched not one but three ESG mutual funds and an exchange-traded fund this month. With them, Fidelity’s total range of ESG funds reached 15.
And Fidelity is far from alone. Investment giant Amundi recently added a new ESG fund to its range for the United States, called Pioneer Global Sustainable Equity Fund. Blackrock, the world’s largest asset manager, owns half a dozen ESG funds. Vanguard has more. ESG funds – mutual or exchange-traded, passive, active or a combination of the two – are the way of the future, it seems.
Where are they?
The Financial Times reported this week that an ESG exchange-traded fund backed by none other than the United Nations itself was set to fold. The reason: lack of investment. The fund, MSCI Global Climate Select, had attracted less than $2 million in investment.
The fund excluded fossil fuel companies, as all ESG funds do, and focused on low-emission companies. The top 10 stocks in his portfolio included Tesla, Apple, Microsoft and Alphabet, Google’s parent company. And yet the fund manager plans to shut it down by next month because no one wants to invest in it, including major Wall Street banks that had pledged seed capital for the ETF.
Perhaps the fund is failing because there is already a fairly large selection of ETFs focused on low-emission, non-fossil fuel companies. The reasons for the fund’s failure are perhaps more complex. The fact remains that the banks that had promised to inject money into it have not done so.
According to the banks themselves, as cited by the FT in its report, their seed capital pledges were also dependent on other investors joining the fund. Some of them, including Citi and Bank of America, said their investment commitments include a provision that their holdings in the fund not exceed 25% of its total size, which was impossible when its total size was of $2 million and their pledges were, respectively, up to $50 million and $12.5 million.
Another interesting fact is that the banks that pledged the money were all members of the Global Alliance of Investors for Sustainable Development, a group of 30 companies aiming to financially support the United Nations climate goals. Worth around $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 these funds. Their creators claim to be made up of responsible companies on the environmental, social and governance levels. A quick check shows that at least some of these funds are simply ETFs like all the others, except they don’t include traditional energy stocks.
Take, for example, Vanguard’s ESG US 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 energy investment firm – Greencoat UK Wind – and, interestingly, Chinese government bonds.
Now, since ESG funds prioritize emissions reduction efforts and, to a lesser extent, work on improving social and governance track records, one can assume that all of these companies have made commitments to that effect or are working already on these issues.
Tech giants, for example, are a safe bet for ESG fund managers because they have made huge and very vocal commitments to emissions reductions and renewable energy purchases. The same goes for other big companies just because they are in the spotlight. But does this mean that they will actually honor these commitments? This is where things get really interesting and quite confusing.
The issue of measuring ESG performance is gaining more and more attention because there is no standard way to measure how companies that have made climate commitments are actually working towards these goals. “Green bleaching” is increasingly in the headlines, with activists accusing companies of making empty promises and continuing to do business as usual at the expense of the planet.
So ESG investing is in troubled waters right now. Appetite is growing, and so is supply, but you can never be sure that the ETF you’re investing your hard-earned money in to make the world a better place is, in fact, made up of companies that are serious about reducing emissions. . or just go through the steps to please investors and keep them on board. This may be why the UN-backed ETF failed. It might not be the only one.
By Irina Slav for Oilprice.com
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