Our readers know that there aren't many people out there who have been more critical of "ESG" investing than we have. That's why you can officially color us not surprised that so-called "Climate Change ETFs" are actually undermining and are counterintuitive to the fight against global warming.
ETFs that move with “low carbon”, “climate change” or “Paris-aligned” indices "alocate little of their money to the greenest companies and habitually increase the weighting of companies whose environmental performance is deteriorating," according to a new report from FT. We're shocked. Shocked, we tell you.
The conclusion was brought to light by French business school Edhec, who recently penned a paper called Doing Good or Feeling Good? Detecting Greenwashing in Climate Investing.
The paper's co-author, Felix Goltz, said: “Since considerable investment is necessary to ensure electrification of the economy and decarbonisation of electricity, underfunding of this sector in climate-aligned benchmarks, which can correspond to a reduction in capital allocation of up to 91 per cent, would constitute the most dangerous form of portfolio greenwashing,”
Goltz continued: “The key issue is not how to restrict investment in these industries, but rather, how to make sure that these industries invest in technology that allows them to produce needed goods and services with minimum release of greenhouse gases.”
And, of course, the revelation comes as record flows pour into any ETF that has "green" or "ESG" in its name with little or no thought involved.
The study found that 35% of companies that have worsening environmental performance have been rewarded in weighting. This number rises to 41% of stocks with deteriorating carbon intensity, the report notes.
Goltz argued: “This number should be zero. This inconsistency between climate performance and weights in investors’ portfolios removes any credibility from the engagement actions that investors conduct with these same companies.”
Goltz says the lack of "common sense rules" to prevent weighting changes like these was to blame: “Climate strategies, just like business-as-usual strategies, are mostly influenced by the market capitalisation of stocks. The climate score plays second fiddle at best.”
“This demonstrates the dominance that these indices have in the investment management industry. [Climate funds] can reflect the current structure of cap-weighted indices but that’s not necessarily aligned with climate change objectives.”
“The recent ESG scramble within the fund industry to meet the somewhat vague definitions of Article 8 and Article 9 [the sustainable classes of funds within the EU’s SFDR] has inevitably tempted many asset managers to reach into their make-up bag and apply the green lipstick a little too liberally across their ranges," said Kenneth Lamont, senior fund analyst for passive strategies at Morningstar.
Recall, just days ago we wrote about funds simply rebranding as ESG and watching the inflows pour in. Just last year alone, 25 funds were rebranded as sustainable, according to data from Morningstar. The Wall Street Journal pointed out three examples last week:
The American Century Fundamental Equity Fund is now the Sustainable Equity Fund, the USAA World Growth Fund is the USAA Sustainable World Fund and the Putnam Multi-Cap Growth Fund is now the Putnam Sustainable Leaders Fund.
“You have big fund companies with an inventory of funds, a lot of which aren’t really attracting assets anymore, saying ‘OK, here’s this new investment trend happening; what do we do,'" said Morningstar Head of Sustainability Research Jon Hale.
35 of 64 rebranded funds since 2013 "were suffering from investor withdrawals in the three years before they went green". Once the rebranding was complete, 13 funds saw investors put cash back into the funds.
Meanwhile, funds like the USAA Sustainable World Fund holds more than $100 million worth of 47 fossil fuel companies. The Sustainable World Fund holds shares of mining companies like Rio Tinto, the report noted.
Mannik S. Dhillon, president of VictoryShares & Solutions, an investment adviser for USAA, told the WSJ: “We believe incorporating ESG considerations into a portfolio should be an input under a larger mosaic of considerations any manager evaluates to achieve a well-balanced, diversified portfolio.”
The American Century Investment’s Fundamental Equity Fund was also seeing outflows for years before it rebranded in 2016. Since then, it has brought in $1.7 billion.