Increasing Pressure on ESG Managers to Prove Funds Reflect Sustainability Values

Recent scrutiny and pressure by the Securities and Exchange Commission is looking to ensure fund managers are being honest about their ESG claims for their funds.

The SEC along with the German financial regulator BaFin, announced last week that Deutsche Bank AG’s DWS Group asset-management arm was at the early stages of investigations into claims that their environmental and potentially social credentials of some funds were being misstated, as reported in Bloomberg. DWS denies the claim, but it reflects a narrowing focus by the SEC into the ESG credentials touted by fund managers.

According to InfluenceMap, a London-based nonprofit, over half of all climate-related funds do not meet the Paris Agreement goals and do not reflect a rapidly warming planet, said Christiana Figueres, former executive secretary of the United Nations Framework Convention on Climate Change. She believes that the investment industry needs to commit to strategies that push for lower carbon footprints and help reduce global warming.

InfluenceMap found in their research that over 55% of fossil-fuel free, low-carbon, and green energy funds were not as sustainable as they had claimed to be and that 70% of ESG funds failed to meet their goals.

“As the number of ESG and climate-themed funds has exploded in recent years, so too have concerns among investors and regulators about greenwashing and transparency,” said Daan Van Acker, an analyst at InfluenceMap.

In March, the SEC created a task force to begin looking into the sustainability claims that firms and fund managers make. SEC Chair Gensler has said since taking over in April that his office would be focusing on creating disclosure and transparency for ESG funds to protect investors.

Global investing in ESG has increased over 50% since 2016 to $35.3 trillion and reflects a burgeoning investment area. While there are increasing regulations in Europe, the U.S. has yet to have any type of ESG standard with oversight.

EFIV Does the Research

While there are no standardized ESG criteria, State Street looks to supply investors with solidly researched investment opportunities by asking the important questions of the companies it invests in.

For example, the SPDR S&P 500 ESG ETF (EFIV) tracks the S&P 500 ESG Index, an index that selects from top companies that meet ESG criteria within the S&P 500 while also adhering to the sector weights of the S&P 500 Index.

EFIV utilizes SPDJI ESG scores to rank companies based on their sustainability. This score is derived from analyzing a thousand data points covering various topics collected from companies and then asking roughly 120 questions, according to the S&P Global website.

EFIV excludes companies involved in tobacco, controversial weapons, those that derive 5% or greater of their revenues from thermal coal extraction or generate power from coal, or that score low in United Nations Global Compact standards.

The ETF’s top three sector allocations include 30.73% in information technology, 13.75% in consumer discretionary, and 12.88% in healthcare, as well as several other smaller allocations.

EFIV has an expense ratio of 0.10%, making it one of the cheapest ESG ETFs on the market.

For more news, information, and strategy, visit the ESG Channel.