Earth-saving promises in ESG fund prospectuses aren’t all that green: report

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Is that the fund firm that promised to help you save the world and put your retirement nest in front of you?

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Malicious or not – loose regulations and uneven reporting make it difficult to enforce intent – ​​a language problem faced by firms that build portfolios with stocks, mutual funds and exchange-traded funds under the banner of environmental, social and governance, or ESG Might be possible.

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The University of California, San Diego, and nonprofit sustainable-investment advocacy group As You Sow concluded that the linguistic patterns found in mutual fund and ETF prospectus language they reviewed have relatively little correlation with ESG ratings. The associate teams spent four months analyzing 94 mutual funds and ETFs with “ESG” in their names.

“We see funds in the name of ESG getting fizzled out on our screening tools because they have dozens of fossil fuel-extraction companies and coal-fired utilities,” said As You So CEO Andrew Behr.

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their report indicated that investors may not be able to tell the difference between a prospectus for a true ESG as opposed to a so-called green washing Mutual Funds and ETFs.

,The linguistic patterns found in mutual fund and ETF prospectus language have relatively little to do with its ESG rating.,


– As you sow and university. Researchers from San Diego, California

For example, there are currently several “fossil-free” fund claims with significant investments in conventional oil CL00,
+0.28%
and gas NG00,
-0.30%
companies, the researchers said.

One reason may be that a fund is operating under a “low-carbon transition” theme, by which big energy firm ExxonMobil XOM,
+4.21%,
chevron cvx,
+2.29%
and others, as well as fossil-fired utilities such as Duke Energy (DUK),
-1.27%
and Southern Company SO,
-1.28%,
Has diversified its business lines into solar, wind and other renewable energy. Nevertheless, the “transition” timeline is often a moving target, and so far, unenforceable. Most do the right thing for their main profit centers of pumping oil and gas, or powering the US electric grid with natural gas or coal, whichever is more cost-competitive as markets go up and down.

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This type of portfolio diversification can occur when funds are operating under more than one mandate: “growth” and “ESG”, for example. In that regard, tech stocks have historically delivered padded returns for most ESG funds otherwise. Others have gone at an arm’s length about “sustainable” investing, arguing that shareholder activism and ownership will only lead to a “cleaner” transition, not ignoring these stocks altogether.

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What’s in a word?

As You Sow and UC San Diego research teams explain their methodology Here, but briefly he combed the prospectus for words such as “carbon,” “weapon” or “labour.” The analysis also looked at the “wiggle terms” often found in prospectus language to make ESG words less precise: they include “can consider,” “believe,” and “possibly,” among others.

As Yu So said it approached the university team with the focus of 3,000 mutual funds and ETFs in nonprofits. invest your values Of the scorecards, 94 had “ESG” in their name – yet 60 of these earned a “D” or “F” on one or more ESG criteria. That scorecard marks the companies in the fund in seven areas: fossil fuels, deforestation, gender equality, civilian firearms, prison industrial complexes, military weapons and tobacco.

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Much has been left open to investor interpretation. Investors who are already considering risk tolerance, diversification and other factors. In addition, the ostentatious return may allow some investors to waive 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,
+0.93%
and the $450 million SPDR S&P 500 ESG ETF EFIV,
+0.90%
increased by 31.4% and 31.3%, respectively.

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key influencer

The investment community, especially the arm that is supporting socially conscious and environmentally sound stocks, funds, and ETFs, is looking for a way to get into the fight for slowing the nascent growth of green technology or alternative energy companies. As it exploded rapidly. Advancing global warming and greater representation on corporate boards, demanding that these types of investments stay true to purpose and churn out positive returns.

BlackRock BLK,
+1.70%,
The world’s largest fund manager, with $9 trillion in assets under management, has made a stellar performance of its call for corporate climate disclosure, including the Big Oil firms it still funds, and to address climate change for a lifetime. Announces investment opportunity.

Back in 2019, BlackRock and CEO Larry Fink announced their intention to increase ESG investments more than ten times From $90 billion to a trillion dollars over a period of a decade.

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,‘It’s a very helpful discussion, but it’s also a challenging discussion because we want to be with these companies for decades.’,


— Sandy Boss, BlackRock Head of Investment Stewardship

Sustainable-investing advocates embrace BlackRock’s heft when it comes to ESG, but criticize what they argue is a barge turn for the fund giant.

Peter Uhlenbrook, an investor activist, head of investor standards at ShareAction Group, said, “The science on climate change has been clear for many years… Told S&P Global Last year.

Sandy Boss, global head of investment management for BlackRock, said at a bipartisan Policy Center event last February that asset managers are doing more to engage with companies on climate change issues.

“It’s a very helpful discussion, but it’s also a challenging discussion because we want to be with these companies for decades,” Boss said. “We are seeing rapid stagnation and climate change in investments is accelerating really fast. We have all seen that when capital markets move, they can move incredibly fast.”

Universal Owners, which released the report using a cost-benefit model for carbon intensity and other information investors should have, called fund firm Vanguard the world’s second largest asset manager, saying that It leverages climate branding through inclusion. Net Zero Asset Managers Initiative But continues to invest the capital of its beneficiaries in “harming” fossil-fuel companies. Vanguard responded to a request for comment by the end of trading Tuesday.

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,‘The problem is that there is no truth in the labeling.’,


— Peter Behar, As You Sove

The findings of the ESG “Greenwashing” report also encouraged a call to action. The authors note that the investment world – regulators such as the Securities and Exchange Commission, in particular – should create a universal terminology and apply such language when it comes to enticing investors into the ESG space.

“The purpose of this study is to underscore the need for the creation of a common glossary of terms and fund classification. [Securities and Exchange Commission] Enforcement,” said As You So Behar. “This will help eliminate confusion and deceptive marketing, fund naming and prospectus language.”

The teams took their findings to the SEC, which is considering stricter regulation How publicly traded companies calculate and report climate change risks, such as erosion of coasts or higher insurance premiums for their shareholders. The SEC is also reviewing how funds and ETF firms sell…

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