Earth saving promises in ESG fund prospectuses are not so green: report

The fund company that promised to help you save the world and align your retirement nest is lying to you?

Malicious or not – loose regulations and uneven reporting make intention difficult to enforce – companies that build portfolios with stocks, mutual funds, and exchange traded funds under the banner of environmental, social and governance, or ESG, may have a language problem.

The University of California at San Diego and the nonprofit sustainable investment advocacy group As You Sow concluded that the linguistic patterns found in the language of the prospectuses of the mutual funds and ETFs they examined have a relatively low correlation with its ESG rating. The collaborating teams spent four months analyzing 94 mutual funds and ETFs with “ESG” in their name.

“We are seeing funds with ESG in their names getting F’s on our screening tools because they own dozens of fossil fuel mining and coal-fired utilities,” said Andrew Behar, CEO of As You Sow.

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Their report said investors might not be able to tell the difference between a prospectus for a true ESG as opposed to so-called greenwashing mutual funds and ETFs.

The language models found in the prospectus language of mutual funds and ETFs have a relatively low correlation with their ESG rating.

– As You Sow and Univ. from California, researchers from San Diego

For example, there are currently many claims of “fossil-free” funds with large investments in traditional oil. CL00
and NG00 gas
companies, the researchers said.

One reason could be that a fund is operating under a ‘low carbon transition’ theme, where even large energy companies ExxonMobil XOM,
Chevron CVX
and others, as well as fossil fuel utilities like Duke Energy DUK
and Southern Co. SO,
have diversified their activities into solar, wind and other renewable energies. Yet the “transition” timeline is often a moving target and, for the moment, unenforceable. Most operate faithfully at their primary profit centers of pumping oil and gas, or feeding the U.S. electricity grid with natural gas or coal, whichever is more competitive as the markets go up. and descend.

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Such portfolio diversity can occur when funds operate under multiple mandates: “growth” and “ESG”, for example. In this regard, tech stocks have historically had cushioned returns for otherwise predominantly ESG funds. Others with an independent view of “sustainable” investing have argued that activism and shareholder ownership is what will drive the “cleaner” transition, without completely ignoring these actions.

Read: The “dirty” US economy rebounded faster than overall growth last year – here’s how

What’s in a word?

The research teams at As You Sow and UC San Diego have explained their methodology here, but in essence, they combed through fliers for words like “carbon,” “weapons,” or “work.” . The analysis also looked at “variable terms” often found in prospectus language to make ESG terms less precise: they include “may consider”, “believe” and “possibly”, among others.

As You Sow said, he approached the college team after noticing that of the 3,000 mutual funds and ETFs on the association’s Invest Your Values ​​online dashboard, 94 had “ESG” in their name – but 60 of them scored a “D” or an “F” on one or more ESG criteria. This scorecard reports companies in funds in seven areas: fossil fuels, deforestation, gender equality, civilian firearms, the industrial prison complex, military weapons and tobacco.

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Much remains open to interpretation by investors. Investors who are already considering risk tolerance, diversification and other factors. Plus, spectacular returns may allow some investors to forgive the labeling, at least for now.

ESG had an exceptional year in 2021. For example, the $ 867 million Xtrackers S&P 500 ESG ETF SNPE
and the $ 450 million SPDR S&P 500 ESG ETF EFIV
gained 31.4% and 31.3% respectively.

Read: ESG ETFs won 2021, but CFRA’s Todd Rosenbluth says to be selective

Main influencers

The investment community, particularly the arm that backs socially responsible and environmentally responsible stocks, funds and ETFs, is increasingly torn between encouraging the nascent growth of green technologies or alternative energy companies like A way to get into the fight to slow global warming and push for greater representation on boards early, while demanding that these types of investments stay true to their purpose and generate positive returns.

BlackRock BLK,
the world’s largest fund manager with $ 9 trillion in assets under management, has made much of its call for disclosure of the business climate, including to the big oil companies it still finances, and stating that climate change is the investment opportunity of a lifetime.

In 2019, BlackRock and CEO Larry Fink declared their intention to more than tenfold ESG investments, from $ 90 billion to $ 1 trillion within a decade.

Read: BlackRock’s Larry Fink warns oil assets will pass into private hands to avoid scrutiny – and that’s ‘greenwashing’

“It’s a very encouraging discussion, but it’s also a difficult discussion because we want to be with these companies for decades.”

– Sandy Boss, Head of Investment Management at BlackRock

Sustainability advocates embrace BlackRock’s weight in ESGs, but have criticized what they see as a barge-like turn for the funds giant.

“The science on climate change has been crystal clear for many years … yet the world’s largest asset manager, with remarkable resources, only started taking concrete action last year,” Peter Uhlenbruch, Head of Investor Standards at ShareAction, an investor activist. group, told S&P Global last year.

Sandy Boss, global head of investment management for BlackRock, told a Bipartisan Policy Center event last February that the asset manager was doing more to engage with businesses on climate change issues.

“It’s a very favorable discussion, but it’s also a difficult discussion because we want to be with these companies for decades,” Boss said. “We are increasingly seeing that sustainability and climate change in investing are really accelerating. We’ve all seen that when capital markets move, they can move incredibly fast. “

Universal Owner, who publishes reports using cost-benefit models for carbon intensity and other information he thinks investors should have, called fund firm Vanguard, the second-largest asset manager in the world. world, claiming that she is leveraging the climate brand by joining Net Zero Asset Managers. Initiative but continues to invest the capital of its beneficiaries in “harmful” fossil fuel companies. Vanguard responded to a request for comment before work was completed on Tuesday.

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“The problem is, there is no truth in the labeling. “

– Peter Behar, As you sow

The findings of the ESG report on greenwashing also encouraged a call to action. The investment community – regulators such as the Securities and Exchange Commission, in particular – should create a universal glossary and apply such language when it comes to attracting potential investors to the ESG space, noted the authors.

“The purpose of this study is to highlight the need to create a common glossary of fund terms and classifications subject to [Securities and Exchange Commission] law enforcement, ”said Behar of As You Sow. “This will help eliminate confusion and misleading marketing, fund naming and prospectus language.”

The teams presented their findings to the SEC, which is considering stricter regulations on how publicly traded companies calculate and report climate change risks, such as coastline erosion or higher insurance premiums. for their shareholders. The SEC also examines how ETF funds and companies sell their ESG philosophies.

“The problem is, there is no truth in the labeling. If those funds were groceries, a jar labeled “peanut-free” may contain 19% peanuts and people with nut allergies would end up in the hospital, “Behar said. “When investors put their hard-earned money in an ‘ESG’ or ‘fossil-free’ fund, they expect to reduce their climate risk and not own big oil, coal and deforestation.”

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