ESG ETFs Looking Polluted

ESG ETFs Looking Polluted

The liberal use of ‘ESG’ on exchange-traded products is a disservice to the spirit of the space.

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Reviewed by: Drew Voros
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Edited by: Drew Voros

[ETF Pulse appears Mondays and Thursdays. Drew Voros is Editor-in-Chief of ETF.com.]

When blockchain ETFs first launched three years ago, the SEC took a rather odd stance in allowing blockchain ETF approval: Watch your words, or else.

The "Regulator of Words and U.S. Financial Markets" would not allow issuers to use “blockchain” in the names of the ETFs that launched and in subsequent ones that followed.

So, we ended up with the SEC Tower Of Babel labeling of blockchain ETF and as such:

It’s really like something out of the classic novel of confusion, “Catch-22,” that the SEC would allow “blockchain” ETFs as long as they didn’t clearly state that in their names.

"Major Major never sees anyone in his office while he's in his office," —Joseph Heller, “Catch-22”

But fast-forward to last month and,  lo and behold, the latest ETF launch: The Global X Blockchain ETF (BKCH), with the forbidden fruit of “blockchain” in the name. How did Global X do that?

Change Of Heart & Wording

The SEC recently did away with its silly word rule and did inform issuers who had been denied the usage of “blockchain” to go ahead and change their funds’ names if they wanted.

I’m told that making that happen would cost issuers around $30,000 minimum, plus all the marketing material that needed changing, to say nothing of investors being left confused.

The "Regulator Of ETF Words" had disallowed the use of the word three years ago, but SEC “Catch-22” was and is alive and well. Now it's OK. Got it?

“[They] agreed that it was neither possible nor necessary to educate people who never questioned anything,” — Heller, “Catch-22”

But when it comes to ESG—the hottest ETF marketing ploy since smart beta ETFs crept into the lexicon—anything goes. The damage is that the liberal use of “ESG” in ETF names is a disservice to ESG ETFs that are true to the calling.

There seems to be no standard for the SEC blessing for an ETF to be truly "ESG." 

Buying Carbon Offset Is Not ESG

The most egregious use of the ESG label comes from funds that either invest in companies that buy carbon offsets to repair the damage they have done to earth or are playing the carbon credit market.

Carbon credits and offsets do not make a company or an ETF “ESG.” Buying offsets or playing the carbon credit is simply capitalizing on the idea that you can buy your way out of the damage you do to the earth, like buying your way out of the Civil War draft.

And when it comes to companies mining profits from fossil fuels, the tale grows darker. The vast majority of equity ESG ETFs as of last year—83%—has some exposure to fossil fuel users and producers, even if those funds have carbon-emissions-related screens in place.

For example, the $21.6 billion iShares ESG Aware MSCI USA ETF (ESGU), which is the largest ESG ETF, also invests the most dollars in dirty energy, investing just less than 10% of its net assets in the stocks of fossil fuel companies.

Exxon, Chevron and Halliburton, etc., are all represented throughout the ESG space, which has to come as a surprise to many investors.

Take the classic example of the FlexShares STOXX U.S. ESG Select Index Fund (ESG), which holds 1.2% in Exxon and 0.96% in Chevron, stakes smaller than .20% in oil service firm Schlumberger, Conoco, Dominion Energy, Valero and Occidental. SEC has no issue here … keep walking, nothing to see.

(Use our stock finder tool to find an ETF’s allocation to a certain stock.)

Gold Is Not ESG

It actually gets worse overseas, where such audacity around ESG has fueled the stunning and oxymoronic “ESG Gold ETF.”

That’s right, the first ETF offering an ESG overlay on gold mining equities launched this summer, as our corporate brethren and media partner ETF Stream reported in June, “Europe’s First Gold Mining ESG ETF To Launch.”

“The AuAg ESG Gold Mining UCITS ETF (ESGO) will list on the London Stock Exchange with a total expense ratio (TER) of 0.60%.Tracking the Solactive AuAg Gold Mining index, ESGO offers exposure to the 25 gold mining companies that perform best on ESG screening metrics provided by Sustainalytics.

Applying an equal weighting methodology, each constituent will hold a 4% weighting in the index.

HANetf said the introduction of strategies such as this will encourage more virtuous behaviours within the mining industry, including the construction of on-site solar farms, using fuel-cell mining trucks and post-project site restoration.

Likely not to be the last product of its kind, ESPO and its successors will face close scrutiny from some investors about the possibility of applying ESG screens to a traditionally high-polluting sector.”

The idea of ESG being applied to oil companies and ETFs that invest in them, and to gold mining companies and related ETFs, makes ESG very creaky and flimsy. Have you ever seen an open-pit gold mining operation? It's not a pretty site. But just don’t call them “blockchain.”

When the SEC or any regulatory body begins restricting language that introduces confusion rather than clarity, we should be alarmed.

How is anybody being served with the dilution of ESG branding while on the other side of the street you better watch your tongue on certain subjects? Will the first bitcoin ETF be able to use “bitcoin” in its label?

“There was no telling what people might find out once they felt free to ask whatever questions they wanted to,” — Heller, “Catch-22"

Drew Voros can be reached at [email protected]

Drew Voros has nearly 30 years' experience in financial journalism. He was a longtime business editor for the Oakland Tribune and sister papers of the Bay Area News Group, and finance writer for the Hollywood trade publication Variety. Voros' past roles have also included editor-in-chief at etf.com and ETF Report.