Just because an ETF has ESG in its name doesn’t mean it lives up to the hype.
An analysis of almost 100 mutual funds and ETFs by the University of California has highlighted the difficulties of telling the difference between a true ESG fund versus a greenwashed one.
As You Sow CEO Andrew Behar said that ESG investing in funds and ETFs is the Wild West right now, due to the absence of widely accepted terminology, and little enforcement of those who try to pull the wool over the eyes of investors.
“We see funds with ESG in their names getting Fs on our screening tools because they hold dozens of fossil fuel extraction companies and coal-fired utilities,” he said.
The research found that just 60 out of 94 funds positioning themselves as ESG-adjacent scored poorly when it came to their actual investments in fossil fuels, deforestation, gender equality, civilian and military firearms, prison industrial complex and the tobacco industries.
Mr Behar said that the research was an effort to underscore the need for the wider finance ecosystem to develop a common glossary of terms and fund classifications around ESG.
“This will help to eliminate confusion and misleading marketing, fund naming, and prospectus language,” he said.
In order to cut down on the potential for investors to be misled, Mr Behar said that a broader shift towards “truth in labelling’ is necessary.
He implored asset managers to better establish the underlying ESG philosophy of their fund and align the language inside and outside the prospectus with that intent.
“The problem is that there is no truth in labelling. If these funds were groceries, then a jar labeled ‘peanut-free’ may contain 19 per cent peanuts and people with a nut allergy would end up in the hospital.
“When investors put their hard-earned money into an ‘ESG’ or ‘fossil free’ fund they expect to reduce their climate risk and not own big oil, coal and deforestation,” he said.
The team behind the research said that they have already met with the Securities Exchange Commission (SEC) division of investment management and shared their findings.