Dirtiest & Cleanest ESG Funds

Dirtiest & Cleanest ESG Funds

We look at the ETFs with the highest exposure to fossil fuel companies, and those with no exposure.

LaraCrigger_200x200.png
|
Reviewed by: Lara Crigger
,
Edited by: Lara Crigger

A little over two years ago, I wrote "Fossil Fuel Free ETFs That Aren't," about how the vast majority of environmental, social and governance (ESG) ETFs had exposure—sometimes significant—to fossil fuel companies.

Over the past two years, the number of ESG ETFs has grown by 65%, and tens of billions of new investment dollars have flowed into the space. Still, not much has changed: As in 2018, the vast majority of equity ESG ETFs today—83%—have some exposure to fossil fuel users and producers, even if those funds have carbon-emissions-related screens in place.

Even ETFs designed and marketed specifically for the avoidance of fossil-fuel-related businesses—such as low carbon intensity ETFs, or ETFs of companies without fossil fuel reserves—still generally contain some oil, coal and natural gas stocks in their portfolio.

Finding Fossil-Fuel-Free Funds
I ran the 107 socially responsible ETFs currently available through the Fossil Free Funds' database, a free tool from As You Sow that allows investors to search thousands of mutual funds and ETFs for “dirty energy” companies. (As You Sow also offers screens for involvement in deforestation, civilian and military weapons, tobacco and gender equality initiatives.)

Fossil Free Funds designates stocks as "fossil fuel companies" using Morningstar industry classifications and third-party proprietary research on emissions output, fossil fuel reserves, business activity and more. Flagged stocks include coal miners, oil/gas producers and refiners, oilfield services companies, fossil-fuel-fired utilities, and more.

Seventy-three funds had listings in the database; the remainder were fixed income ETFs, which do not hold stocks; exchange-traded notes, which do not hold any securities at all; and funds launched within the last two months.

The ‘Clean Dozen’
Of the 73 ESG ETFs screened for greenhouse gas emissions and/or company involvement in the fossil fuel industry, only 11 funds were completely free from fossil-fuel-related activity.

A twelfth, the Nuveen ESG Large-Cap Growth ETF (NULG), had just $21,000 invested in a single oilfield services company, representing barely 0.01% of its total assets under management (AUM).

The "clean dozen" are listed in the table below:

 

The 'Clean Dozen': ESG ETFs With No Exposure To Fossil Fuels
TickerFundExpense RatioAUMESG RatingQuality ScoreCarbon IntensityFossil Fuel ExposureTotal Investment (M)
NULG Nuveen ESG Large-Cap Growth ETF0.35%$295.99 AA7.53 / 1022.070.0%$0.02
CHGX Change Finance U.S. Large Cap Fossil Fuel Free ETF0.49%$18.46 A6.05 / 1045.870.0%$0.00
LRGE ClearBridge Large Cap Growth ESG ETF0.59%$104.14 A6.34 / 1033.710.0%$0.00
ETHO Etho Climate Leadership U.S. ETF0.47%$80.24 BBB5.33 / 1063.70.0%$0.00
QCLN First Trust NASDAQ Clean Edge Green Energy Index Fund0.60%$236.00 A5.85 / 10153.820.0%$0.00
PZD Invesco Cleantech ETF0.68%$211.24 A6.68 / 1054.690.0%$0.00
TAN Invesco Solar ETF0.71%$616.72 BBB5.08 / 10282.680.0%$0.00
PBW Invesco WilderHill Clean Energy ETF0.70%$341.19 BBB5.05 / 10220.010.0%$0.00
KGRN KraneShares MSCI China Environment Index ETF0.80%$2.12 BB3.43 / 10628.930.0%$0.00
NUMG Nuveen ESG Mid-Cap Growth ETF0.40%$138.58 A7.01 / 1024.210.0%$0.00
TBLU Tortoise Global Water ESG Fund0.40%$15.78 A6.43 / 10226.990.0%$0.00
EVX VanEck Vectors Environmental Services ETF0.55%$32.54 BB2.91 / 10617.310.0%$0.00

Sources: ETF.com, Fossil Free Funds; data as of June 25, 2020

 

As one might expect, several of these zero-fossil-fuel ETFs are thematic renewable power plays, such as the Invesco Solar ETF (TAN), which invests entirely in solar power companies; or the Invesco WilderHill Clean Energy ETF (PBW), which invests across several green power companies, including those in geothermal and biofuels.

However, four of these ETFs are broad asset allocation funds, meant to supplant or supplement traditional broad market exposure in a portfolio. These include NULG, the Nuveen ESG Mid-Cap Growth ETF (NUMG), the ClearBridge Large Cap Growth ESG ETF (LRGE) and the Change Finance U.S. Large Cap Fossil Fuel Free ETF (CHGX).

Of these four, only CHGX actually markets itself as fossil fuel free. (Read: "3 Hidden Gem ESG ETFs.")

The ’Dirty Dozen’
The 61 remaining ETFs held at least some “dirty energy” stocks, with weightings ranging from 0.20% for the Impact Shares NAACP Minority Empowerment ETF (NACP) to 30.4% for the First Trust Global Wind Energy ETF (FAN).

 

The 'Dirty Dozen': ESG ETFs With Highest Exposure To Fossil Fuels, by % AUM
TickerFundExpense RatioAUMESG RatingQuality ScoreCarbon IntensityFossil Fuel ExposureTotal Investment (M)
FAN First Trust Global Wind Energy ETF0.62%$104.38 AAA9.61 / 10862.5330.4%$29.47
CNRG SPDR S&P Kensho Clean Power ETF0.45%$28.10 A5.83 / 10641.3522.6%$5.45
ESGS Columbia Sustainable U.S. Equity Income ETF0.35%$5.00 AA7.40 / 10355.5318.2%$0.89
BLES Inspire Global Hope ETF0.52%$106.84 A6.10 / 10410.2916.8%$19.01
BIBL Inspire 100 ETF0.35%$99.16 A6.66 / 10426.3313.3%$12.72
FRDM Freedom 100 Emerging Market ETF0.49%$16.45 BBB4.85 / 10267.7211.2%$1.80
LDEM iShares ESG MSCI EM Leaders ETF0.16%$586.28 A6.49 / 10247.699.9%$53.36
YLDE ClearBridge Dividend Strategy ESG ETF0.60%$7.58 A6.34 / 10220.619.5%$0.71
MXDU Nationwide Maximum Diversification U.S. Core Equity ETF0.34%$100.49 BBB5.10 / 10122.628.7%$8.58
WWJD Inspire International ESG ETF0.80%$52.82 A7.05 / 10229.128.4%$3.82
EMSG Xtrackers MSCI Emerging Markets ESG Leaders Equity ETF0.20%$7.63 A6.47 / 10203.688.1%$0.59
MXDE Nationwide Maximum Diversification Emerging Markets Core Equity ETF0.64%$14.95 BB3.61 / 10217.018.0%$1.11

Sources: ETF.com, Fossil Free Funds; data as of June 25, 2020

 

Intriguingly, several emerging market ETFs appear on this list, including the Freedom 100 Emerging Market ETF (FRDM), the iShares ESG MSCI EM Leaders ETF (LDEM), the Xtrackers MSCI Emerging Markets ESG Leaders Equity ETF (EMSG) and the Nationwide Maximum Diversification Emerging Markets Core Equity ETF (MXDE).

That speaks to the difficulty in sourcing clean energy companies in developing countries, whose economies are often based on commodity and resource production, even as these countries make a concerted push into renewable power.

Also notable is the fact that three faith-based ETFs appear on this list, all from the same issuer, Inspire. The $108 million Inspire Global Hope ETF (BLES), the firm's largest equity fund, concentrates its exclusionary screens not on environmental factors but on social factors such as abortion access, gambling involvement and the "LGBT lifestyle" (their words, not ours).

This highlights the industry's continued incoherency around defining what is and isn't "ESG"—probably the single biggest challenge for investors thinking of allocating to these ETFs. Not all values-based investments agree about which values are worth investing in, and just because a fund is classified as "ESG" doesn't mean it invests according to the environmental, social or governance principles investors might be expecting.

ETFs Investing $100s Of Millions In Big Oil
That said, most of the above “dirty dozen” ESG ETFs have less than $100 million in AUM, and as such, their total investment in fossil fuel companies remains relatively small. For example, despite FAN's hefty percentage allocation, the fund invests just $29 million in dirty energy stocks.

The reality is, most of the “dirtiest” ESG ETFs—as in, the ones investing the most into Big Oil and Big Coal on a dollar by dollar basis—are the largest funds in the sector. Big, broad asset allocation ETFs are the most popular types of ESG ETFs, and they funnel millions of dollars into fossil fuel stocks:

 

The 'Dirty Dozen': ESG ETFs With Highest Exposure To Fossil Fuels, by Total Investment
TickerFundExpense RatioAUMESG RatingQuality ScoreCarbon IntensityFossil Fuel ExposureTotal Investment (M)
ESGU iShares ESG MSCI U.S.A. ETF0.15%$6,970 AA7.55 / 10102.046.26%$459.00
ESGE iShares ESG MSCI EM ETF0.25%$3,170 A6.96 / 10164.97.3%$245.95
ESGD iShares ESG MSCI EAFE ETF0.20%$2,470 AA8.44 / 10105.037.2%$161.46
SUSL iShares ESG MSCI USA Leaders ETF0.10%$2,300 AA7.58 / 10143.155.3%$121.14
USSG Xtrackers MSCI U.S.A. ESG Leaders Equity ETF0.10%$2,310 AA7.59 / 10147.055.3%$120.29
SUSA iShares MSCI USA ESG Select ETF0.25%$1,460 AAA8.68 / 1098.665.6%$79.89
DSI iShares MSCI KLD 400 Social ETF0.25%$1,940 AA7.52 / 10112.823.6%$68.47
LDEM iShares ESG MSCI EM Leaders ETF0.16%$586.28 A6.49 / 10247.699.9%$53.36
ICLN iShares Global Clean Energy ETF0.46%$713.56 A6.61 / 10245.547.2%$46.07
FAN First Trust Global Wind Energy ETF0.62%$104.38 AAA9.61 / 10862.5330.4%$29.47
SPYX SPDR S&P 500 Fossil Fuel Reserves Free ETF0.20%$566.47 A6.45 / 10153.715.4%$29.33
CRBN iShares MSCI ACWI Low Carbon Target ETF0.20%$413.00 A6.40 / 1055.135.3%$26.09

Sources: ETF.com, Fossil Free Funds; data as of June 25, 2020

 

Notably, nine of the 12 ETFs on this list are from iShares, which committed to a much-lauded push into sustainable investing earlier this year. (Read: "BlackRock Raises Stakes For ESG ETFs.")

For example, the $7 billion iShares ESG MSCI U.S.A. ETF (ESGU), which is the largest ESG ETF, also invests the most dollars in dirty energy, investing $459 million—6.3%—of its net assets in the stocks of fossil fuel companies.

Why ESG ETFs Invest In Dirty Energy
There are a few reasons why Big Oil and Big Coal stocks might show up in ESG ETFs, and it's not necessarily because the issuers of these funds are trying to pull a fast one on investors.

For starters, broad asset allocation ETFs usually use a ranking methodology to select and construct their portfolios. This means that stocks are graded on various ESG factors—including but not limited to environmental impact—and then ranked, with the worst offenders eliminated from the benchmark. As such, an energy company may rank poorly on environmental criteria but have high social and governance ranks, bumping up its overall score and landing it a place in the fund's portfolio.

But ranked indexes doesn't entirely explain why so many ESG ETFs, especially ones that have built-in environmental screens, have exposure to fossil fuel companies.

The fact is, renewable energy is a complicated business, one with hefty capital expenditures and a quickly shifting regulatory environment. Often, the only companies raising the necessary cash and riding out the uncertainty are those in Big Oil and Big Coal—companies that see the writing on the wall and want to position their businesses for the future.

Oil producers like Chevron (CVX), Royal Dutch Shell (RDS.A) and BP (BP) have invested billions into corn-based ethanol biofuels and hydrogen fuel cells. Utilities like NextEra Energy (NEE) and Duke Energy (DUK) are transitioning away from coal-fired plants and into solar and wind to constrain costs. Even Exxon Mobil (XOM) makes lubricants for wind turbines.

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

Pure-play renewable energy companies are rare. Those that do exist tend to be small caps, falling outside the scope of many ESG ETFs, which have capitalization and liquidity requirements.

There's no purity test for ESG ETFs, and it's debatable whether there even should be. But if climate change matters to you, as it does for millions of investors, then make sure you read beyond a label or a name and check inside the portfolio of any potential ESG investment first.

Contact Lara Crigger at [email protected]

Lara Crigger is a former staff writer for etf.com and ETF Report.