ESG ETFs looking polluted

Fossil fuel companies continue to be a fixture in ESG ETFs

Drew Voros

a tree next to a body of water

When blockchain ETFs first launched in the US three years ago, the Securities and Exchange Commission (SEC) took a rather odd stance in allowing blockchain ETF approval: Watch your words, or else.

The “Regulator of words and US financial markets” would not allow ETF issuers to use ‘blockchain’ in the names of the ETFs that launched and in subsequent ones that followed.

So, the US ETF industry ended up with the SEC Tower Of Babel labelling of blockchain ETF and as such:

It’s really like something out of the classic novel of confusion, Catch-22, that the SEC would allow 'blockchain' ETFs as long as they did not clearly state that in their names.

As written in Joseph Heller’s Catch 22: “Major Major never sees anyone in his office while he is in his office.”

But fast-forward to last month and, lo and behold, the latest ETF launch: The Global X Blockchain ETF (BKCH), with the forbidden fruit of ‘blockchain’ in the name. How did Global X do that?

Change of heart and wording

The SEC recently did away with its silly word rule and did inform issuers who had been denied the usage of ‘blockchain’ to go ahead and change their ETFs’ names if they wanted.

I am told that making that happen would cost issuers around $30,000 minimum, plus all the marketing material that needed changing, to say nothing of investors being left confused.

The “Regulator of ETF words” had disallowed the use of the word three years ago, but SEC Catch-22 was and is alive and well. Now it is OK. Got it?

“[They] agreed that it was neither possible nor necessary to educate people who never questioned anything,” Heller, Catch-22.

But when it comes to ESG – the hottest ETF marketing ploy since smart beta ETFs crept into the lexicon – anything goes. The damage is that the liberal use of ‘ESG’ in ETF names is a disservice to ESG ETFs that are true to the calling.

There seems to be no standard for the SEC blessing for an ETF to be truly ESG.

Buying carbon offset is not ESG

The most egregious use of the ESG label comes from funds that either invest in companies that buy carbon offsets to repair the damage they have done to earth or are playing the carbon credit market.

Carbon credits and offsets do not make a company or an ETF ‘ESG’. Buying offsets or playing the carbon credit is simply capitalising on the idea that you can buy your way out of the damage you do to the earth, like buying your way out of the Civil War draft.

And when it comes to companies mining profits from fossil fuels, the tale grows darker. The vast majority of equity ESG ETFs as of last year – 83% – has some exposure to fossil fuel users and producers, even if those funds have carbon-emissions-related screens in place.

For example, the $21.6 billion iShares ESG Aware MSCI USA ETF (ESGU), which is the largest ESG ETF globally, also invests the most dollars in dirty energy, investing just less than 10% of its net assets in the stocks of fossil fuel companies.

Names such as Exxon, Chevron and Halliburton are all represented throughout the ESG space which has to come as a surprise to many investors.

Take the example of the UBS ETF S&P Dividend Aristocrats ESG UCITS ETF (UBUM). It has a 2.2% weighting to Exxon while the iShares MSCI USA ESG Screened UCITS ETF (SDUS) has a 0.6% weighting.

Gold is not ESG

It actually gets worse in other areas of the market where such audacity around ESG has fuelled the stunning and oxymoronic ‘ESG gold ETF’.

That is right, the first ETF offering an ESG overlay on gold mining equities launched this summer, as ETF Stream reported in June:

The AuAg ESG Gold Mining UCITS ETF (ESGO) will list on the London Stock Exchange with a total expense ratio (TER) of 0.60%.Tracking the Solactive AuAg Gold Mining index, ESGO offers exposure to the 25 gold mining companies that perform best on ESG screening metrics provided by Sustainalytics.

Applying an equal weighting methodology, each constituent will hold a 4% weighting in the index.

HANetf said the introduction of strategies such as this will encourage more virtuous behaviours within the mining industry, including the construction of on-site solar farms, using fuel-cell mining trucks and post-project site restoration.

Likely not to be the last product of its kind, ESPO and its successors will face close scrutiny from some investors about the possibility of applying ESG screens to a traditionally high-polluting sector.

The idea of ESG being applied to oil companies and ETFs that invest in them, and to gold mining companies and related ETFs, makes ESG very creaky and flimsy. Have you ever seen an open-pit gold mining operation? It is not a pretty site. But just do not call them ‘blockchain’.

When the SEC or any regulatory body begins restricting language that introduces confusion rather than clarity, we should be alarmed.

Does ESG stand for Extra Strong Greenwashing LGIM?

How is anybody being served with the dilution of ESG branding while on the other side of the street you better watch your tongue on certain subjects? Will the first bitcoin ETF be able to use 'bitcoin' in its label?

“There was no telling what people might find out once they felt free to ask whatever questions they wanted to,” Heller, Catch-22.

Drew Voros is editor-in-chief at ETF.com

This story was originally published on ETF.com

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