Exchange traded funds that track environmental, social, and governance principles help investors track socially responsible investments, but some question if the fund providers are doing enough to limit exposure to companies with a high carbon footprint.

Jordan Waldrep, the chief investment officer of TrueMark Investments, analyzed the holdings of the largest environmental, social, and governance funds and found that while funds have cut down their exposure to greenhouse-gas emitting companies, these investments have more room for improvement, Bloomberg reports.

The largest ESG-related ETF has seen its greenhouse-gas intensity decline by about 25% over the past year, yet the greenhouse-gas intensity of the S&P 500 would fall 36% by just replacing 55 of the index’s worst corporate emitters, according to Waldrep.

“I don’t think it’s ridiculous to say that should be the bare minimum expectation of a diversified ESG fund,” Waldrep told Bloomberg, adding that reality is that the most popular ESG ETFs hold shares of companies with a carbon footprint that’s not much lower than companies that make up the S&P 500.

Waldrep’s findings are based on the most common emissions metric, which measures a company’s greenhouse-gas emissions relative to total revenue.

“This allows us to look at Facebook or Walmart, and compare how dirty it is to a small-cap business in a fair way,” he added.

The question of sustainability has come under greater scrutiny, especially on complaints that some issuers are ‘greenwashing’ their funds in a bid to be passed off as socially responsible. According to Morningstar data, $347 billion flowed into ESG funds globally in 2020 and more than 700 new funds were created.

“For many, an ESG label may be enough, but investors now have many viable choices and they will have to decide what they want,” Waldrep said.

As the ESG segment gains popularity, the surge in buying will bring more scrutiny about the sustainability credentials attributed to these investment products.

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