Last week saw the launch of six new sustainable investment funds from US fund giant BlackRock: the iShares Sustainable Core Suite, through which the £5 trillion behemoth announced its intention to take environmental, social and governance (ESG) investing ‘mainstream.’
The six new exchange traded funds, or ETFs, will invest in a range of companies across the world, screening out those that invest in weapons, firearms, tobacco, companies implicated in the violation of UN principles, as well as thermal coal and oil sands.
This is not the first foray into ESG for the world’s biggest asset manager, with its iShares platform currently boasting 15 ESG ETFs, which together manage over £230 million.
ETFs track the shares prices of a basket of companies listed on mainstream global indices like the MSCI World or FTSE 100. As they have no managers they are super cheap, often costing less than 0.2 per cent a year. This means they have become incredibly popular, with some funds holding billions.
However, ETFs’ entrance into the world of sustainability has been controversial. This is – fundamentally – because their structure is at odds with ESG or sustainable investing: which is premised on the careful selection and monitoring of companies based on ethical and sustainable principles.
The huge proliferation of ESG and SRI ETFs over the past few years has lead some to accuse providers of trying to cash in on growing investor appetite for sustainability without putting in the legwork: otherwise known as ‘greenwashing.’
Indeed, a glance at a number of these funds often reveals some surprising investments: Exxon Mobil as the seventh largest holding in the iShares MSCI World ESG Screened UCITS ETF, for example; or miner Rio Tinto (currently facing a multi-million pound bribery charge) as the fourth largest holding in the UBS MSCI United Kingdom IMI Socially Responsible UCITS ETF.
Olivia Bowen, partner at ethical advisory firm Castlefield, is a regular expert in the field of greenwashing, with her firm publishing an annual ‘winners and spinners’ report that examines the different shades of green that exist in the sustainable world.
To date BlackRock has escaped being named as a ‘spinner’, however Bowen remains concerned about the new range from the fund giant, particularly its claim to be taking ESG into the ‘mainstream’.
“Blackrock’s vision is for ESG to become the mainstream and we like that commitment to the direction of travel, but we remain to be convinced that passive investments can truly work well within responsible investment – will they really lead to better environmental and social real-world outcomes?”
In particular Bowen points to the fact that, while BlackRock’s new range excludes some damaging industries, it leaves the door open to others. It rules out coal and oil sands, for example, but not conventional oil and gas, while there is also plenty of room for big banks funding corrupt governments.
Arguably this highlights the problem with exclusionary strategies – otherwise known as ‘negative screening’ – as a whole. Screening out bad practices, rather than screening in good ones can often leave an ethical portfolio with a bizarre range of holdings.
John Fleetwood, founder at 3D Investing echoes Bowen’s sentiment, adding that some ESG or SRI ETFs run the risk of duping investors into thinking they have ‘ticked a box’:
“There’s a real danger that these types of funds are not differentiated from other funds that have a much greater positive impact and that bring about change through engagement on social and environmental issues.
“They might lead investors to believe that they have ‘ticked the ethical box’, when in fact, they are still exposed to stocks with high levels of ethical controversy without the engagement processes to effect change.”
Step in the right direction
Despite his scepticism, however, Fleetwood maintains that BlackRock’s move is a step in the right direction, particularly its decision to exclude some of the ‘worst practices’ of the fossil fuel industry.
Indeed, the sustainable ETF industry has seen some positive developments in recent years, including the launch of ‘smart beta’ ESG ETFs that create their own indices to track – lauded as a hybrid between active and passive management.
A recent link up between smart-beta ‘godfather’ Research Affiliates and world leading ESG research platform Vigeo Eiris is perhaps be one to watch here.
As Bowen observes, ETFs can also act as platforms for novice investors not yet willing to leap into sustainability, easing them gently toward a fuller ethical commitment.
However, she adds investors should bear the limitations of ETFs in mind, while the industry must be mindful that the growth of ESG doesn’t undermine the more direct impacts of “true responsible investment”, which at best incorporate a focus on positive industries with engagement.
For more on the best and brightest of sustainable investment funds, see the latest Good With Money Sustainable Investment Review.