‘Dirty little secret’: Exxon inclusion in ESG ETFs highlights carbon emissions issue

Reports revealed Exxon is forecasting its carbon emissions will increase by as much as the output of Greece by 2025

Tom Eckett

a group of tall buildings

A number of ESG ETFs in Europe hold Exxon Mobil despite an internal memo earlier this week revealing the oil company plans to increase its annual carbon-dioxide emissions by as much as the entire output of Greece.

The memo, seen by Bloomberg, showed Exxon forecasted its yearly emissions to rise by 17% to 143 million tons by 2025 at a time when rivals are looking to curb production amid global pressure to reduce the pace of global warming.

The additional 21 million tons is a net result of the firm’s estimate for increasing production, selling assets and taking efforts to reduce pollution through renewable energy and burying carbon dioxide.

Greenhouse gases (GHG) from direct operations only account for approximately a fifth of the total at a large oil company, according to Bloomberg, with the majority of emissions coming from areas such as customers burning fuel.

Taking these factors – known as Scope 3 emissions – into account means Exxon will be directly or indirectly responsible for an additional 100 million tons of carbon dioxide emissions in 2025.

Despite this however, a number of ESG indices have failed to exclude Exxon from their holdings. The most well-known of these is the S&P 500 ESG index which has a 0.7% weighting to the oil and gas company.

The index has around $1.3bn assets tracking it in Europe across three ETFs, the UBS S&P 500 ESG UCITS ETF (5ESG), the SPDR S&P 500 ESG Screened UCITS ETF (500X) and the Invesco S&P 500 ESG UCITS ETF (SPXE).

When questioned about Exxon’s inclusion, Invesco said the index is designed to improve the overall ESG score but also to deliver performance aligned with the S&P 500.

The firm said in a statement to ETF Stream: “There has been a long running debate about disinvestment/exclusion vs engagement/shareholder influence, it is not clear that the best outcomes are likely to be achieved through disinvesting as at that point the investor has lost the ability to influence company management through their voting rights.

“The fact that Exxon is in the index means that it is in the top 75% of ESG scores in the energy industry group globally and in the S&P 500. Put more simply, within the S&P 500 index there are energy companies that do less well than Exxon from an ESG perspective and these are excluded from the index.”

S&P Dow Jones Indices added: "SPDJI offers a variety of ESG indices to accommodate diverse investment objectives. Some of our indices reflect a strategy of complete divestment of fossil fuel companies; while others offer investors the ability to remain engaged with the broad market while reducing exposure to fossil fuel companies and carbon emitters."

Other ESG ETFs listed in Europe also include Exxon in their portfolio. This includes HSBC Global Asset Management’s recently launched HSBC USA Sustainable Equity UCITS ETF (HSUS) and the HSBC Developed World Sustainable Equity UCITS ETF (HSWD) which have 0.3% and 0.2% weightings, respectively.

Tracking newly created FTSE Russell indices, these ETFs target a 50% carbon emissions reduction and a 50% fossil fuels cut relative to the parent indices which certainly begs the question why they would include a company such as Exxon which is planning to increase its emissions.

Furthermore, the iShares MSCI World ESG Screened UCITS ETF (SAWD) and the iShares MSCI USA ESG Screened UCITS ETF (SDUS) also have 0.3% and 0.2% weightings, respectively.

Greenhouse gas emissions

Looking more broadly at the ESG ETF space, the Exxon development highlights a key issue for ESG ETFs and that is their effectiveness in reducing GHG emissions relative to the parent index.

Jordan Waldrep, CIO of TrueMark Investments, a US ETF issuer, has described the lack of steps taken to reduce the GHG emissions within ESG ETFs as the industry’s “dirty little secret”.

According to research conducted by Waldrep and his team, there are a number of ESG ETFs that have similar GHG emissions to their core equivalents.

For example, the UBS EURO STOXX 50 ESG ETF (E50ESG) has a GHG average weighted intensity score of 216.3 while the iShares Core EURO STOXX 50 UCITS ETF (CSX5), an ETF tracking the non-ESG parent index, has a score of 204.6. This is despite E50ESG’s stronger overall ESG score of 86 versus 83.6 for EUE.

The GHG weighted averages are based on the weightings of companies in the ETF with GHG numbers issued by companies and provided by Bloomberg. Companies with patchy reporting receive a 5-10% penalty while a company that does not report their emissions receives a 20% penalty after average industry emissions have been applied.

While Waldrep said high average GHG emissions within ESG ETFs was not as much of an issue in Europe as in the US, he stressed the ease at which it could be solved. For example, removing the top five GHG emitting names in the STOXX Europe 600 takes out 160 tonnes of carbon emissions per million dollars of revenue.

“There is no depth or thought when constructing these indices,” Waldrep said. “It does make me wonder what index providers are looking at as it is not the underlying environmental impact of carbon emissions.”


This is not the first time a company’s inclusion within ESG ETFs has been questioned. Wirecard, for example, which announced a €1.9bn black hole in its finances in June, was held by the iShares ESG MSCI EAFE ETF (ESGD) while Vanguard came under fire last year after it had a number of companies from the tobacco, gambling and alcohol industries within its ESG products.

The US giant removed as many as 29 stocks including gun manufacturer Sturm Ruger from Vanguard ESG US Stock ETF and the Vanguard ESG International Stock ETF in August 2019.

This and a number of other questionable inclusions in ESG products led UK wealth manager SCM in November last year to call on the Financial Conduct Authority (FCA) to conduct a review of ethical strategies with SCM Direct’s CIO Alan Miller bemoaning the “widespread misclassification and mis-selling” that was taking place.

Steps have been taken by regulators to address greenwashing issues by introducing stricter rules around ESG standards. Last June, the EU Commissions introduced new disclosure requirements to the European market and in September launched a consultation to regulate green claims in marketing materials.

Featured in this article