As the world grapples with the coronavirus pandemic, heightened social unrest, and volatile climate change, investors have shifted into socially responsible investments and exchange traded fund strategies that track environmental, social and governance factors.
Inflows into ESG-related ETFs jumped to $22 billion so far in 2020, or about three times the 2019 total inflows, according Bloomberg data.
However, some critics have warned that investors may be making the jump without examining their landing spots. The ESG label is not fully standardized or regulated by the U.S., so no one can quite agree how to precisely define ESG components.
For example, the iShares ESG Aware MSCI USA ETF (ESGU), one of the more popular ESG plays this year, includes some exposure to Exxon Mobil and Chevron. While these energy companies may not pass muster on the environmental side, the firms may pass through social and governance screens. Additionally, some of the largest ESGU holdings include giant technology names that are under investigation for monopoly abuse, but nevertheless pass environmental screens due to their lower climate impact and green initiatives.
“If you go in there thinking that you want to ‘woke’ up your portfolio, and you see those companies, you’re going to be like, ‘What? That’s not what I signed up for,’” Eric Balchunas, ETF Analyst for Bloomberg Intelligence, said.
BlackRock works with MSCI Inc. to set inclusion and exclusion rules. MSCI, which scores ETFs based their holdings’ environmental, social, and governance risks and opportunities, has a AA rating for ESGU, or one grade below top rating.
The recent outperformance in the ESG category may have also contributed to the increased interest for this sustainable investment theme. According to a recent Nuveen survey, 53% of respondents cited better returns as their reason for choosing responsible investing, while only 51% were more interested because of this year’s natural disasters.
“The preponderance of assets in ESG funds are in ESG light funds,” Ben Johnson, Morningstar’s global director of ETF research, told Bloomberg. “The level of spiciness, if you will, goes from mild to medium to hot – in terms of where the assets are right now, it’s all in pico de gallo.”
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