Todd Rosenbluth, head of research at VettaFi, appeared on ETF Edge to discuss ESG investing along with DWS’s Arne Noack, S&P Global’s Mona Naqvi, and host Bob Pisani. ESG has become a hot-button issue amid news that both Florida and Texas moved to block state fund managers from using ESG considerations in their investment decisions. BlackRock and other firms have come under fire from some corners simply for having ESG funds, with the argument being that ESG funds “boycott” energy stocks.
Fresh off a new piece about ESG, Rosenbluth was asked about these attacks. “This is just ludicrous,” Rosenbluth said, “what you have is broadly diversified strategies that are giving you the best according to not just climate change but also related to fair pay practices, gender diversity, and a whole host of other factors.”
Host Bob Pisani noted that some of the largest ESG funds – including those from BlackRock – are overweighted in terms of energy compared to the S&P. iShares ESG Aware MSCI USA ETF (ESGU) has 4.8% of its holdings in energy while iShares MSCI USA ESG Select ETF (SUSA) has 3.8%. “The argument falls down once you dive into it,” Rosenbluth said, noting that ESG funds often get criticized from multiple sides, with some saying they don’t have enough energy and others saying that any energy at all goes against ESG principle. “These are intended to be broadly diversified products.”
The ESG industry has 186 funds, only 6% of the ETF universe with just 1.5% of its asset base. Many folks disagree about the extent to which ESG influences investing, in part because there is no standardized definition. ESG is a broad concept that can be many different things to many investors. “We wouldn’t be sitting here asking ‘why don’t all growth funds look the same?’ Why should ESG be any different?” Naqvi pointed out.
Pointing to the Xtrackers S&P 500 ESG ETF (SNPE) and the Global X S&P 500 Catholic Values Custom ETF (CATH), Rosenbluth noted that these dramatically different funds both exist under the ESG umbrella. He remarked, “it is really important that investors understand what they are getting and that they are not boycotting ESG in general, they are choosing the fund that fits their objective and ignoring everything else.”
Naqvi noted that the dollars in these funds remain solid, despite the noise from political actors in states like Texas and Florida, and controversies around greenwashing. Greenwashing, where funds appear greener than they are, is just as hard to define and pin down as ESG itself. After all, is an energy company working toward sustainability ESG? Is Tesla ESG or not? Many investors draw the line in different places.
SEC chair Gary Gensler has asked for more clarity around fund names regarding ESG claims. Rosenbluth said, “I think it’s a good thing to ask the question and have asset managers have to answer what is their criteria and be as transparent as possible.”
Pivoting to profit vs purpose, Pisani wondered if ESG investing comes from a different mindset than Milton Friedman’s “profit above all else” positioning. Rosenbluth sees these two positions as not in direct conflict. “Many of the factors that are part of ESG have an intermediate or long-term impact.” Rosenbluth noted research has indicated that more diverse companies tend to be more profitable, while companies that have been sued for bad practices are at greater risk of losing profits. “People are looking at more than how profitable a company is.” Rosenbluth also sees the profit above all else as a limited perspective, given that investors use all sorts of metrics beyond profitability, such as valuations. Rosenbluth noted, “You don’t see anyone boycotting the Nasdaq-100.”
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