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Revealed: The dark side of ethical ETFs

By James Mitchell
7 minute read

As the corporate regulator cracks down on greenwashing, InvestorDaily investigates the questionable stocks held in Australia’s largest ESG funds.

California-based tech giant Nvidia Corporation sits alongside Microsoft, Apple, Google (Alphabet), Meta (Facebook), and Amazon to form the ’MANGMA’ group of stocks — effectively the new FAANGS — which accounts for more than 40 per cent of the Nasdaq Composite Index.

Nvidia’s core business is the design and production of graphic processing units (GPUs). It is one of the largest holdings in the BetaShares Global Sustainability Leaders ETF (ASX: ETHI), which tracks the Nasdaq Global Sustainability Leaders Index and is positively skewed towards climate leaders and negatively skewed against fossil fuels and big polluters.

ETHI is one of the largest “ethical” ETFs in Australia, with approximately $2 billion in funds under management (FUM). It outperformed the ASX 200 by more than 10 per cent over the last year.


Hari Balkrishna, portfolio manager of the T. Rowe Price Global Impact Equity Strategy, said that, in theory, a company like Nvidia could tick the usual ESG boxes — until you look under the hood.

“A GPU or a graphic processing unit is a significantly major step up in energy efficiency compared to a CPU, which is the traditional way to actually create computer power. In theory, you can measure the emissions mitigated or emissions saved as a result of GPUs,” he said.

Video games and crypto mining

However, London-based Balkrishna explained that what makes Nvidia “complicated” for ESG credentials is that around 45 per cent of its core product, GPUs, are used solely for video gaming.

“I’m not going to say it’s an evil activity, but it’s not necessarily the most impactful,” he said. “And then there’s a reasonable chunk that goes into mining cryptocurrency as well, which obviously has a huge carbon emission profile,” Mr Balkrishna told InvestorDaily.

Nvidia GPUs are also used in the development of AI. The jury is still out over the ESG profile of AI technology like ChatGPT.

“With artificial intelligence again, as long as it’s used for a good purpose, you could say it is positive, impactful. But again, you get a little bit in that gray zone,” Mr Balkrishna said.

The portfolio manager has spent a decade at T. Rowe Price and is acutely aware of the evolving ESG regulatory environment. Marketing a fund as “sustainable, ethical or green” carries significant risks. Particularly at a time when more investors are demanding that their portfolios reflect their own values, which are also subject to change.

“The term ‘ESG’ gets used very broadly and loosely, but there are a lot of different elements to it,” he said.

“I’d start with ESG integration, which is effectively what every investor should be doing — looking at any company and understanding if there are any ESG risks. So as an example, if you’ve invested in a consumer staple and they’re basically abusing forests in Indonesia and collecting palm oil or something like that, that’s actually a business risk and a reputational risk that has financial implications that people should be caring about anyway.

“You’ve then got this kind of middle ground, call it ethical, sustainable, and there’s a little bit of a spectrum there in terms of what different ESG lenses are.”

Impact investing versus ESG

Put simply, it is making a value judgement on a sector or multiple sectors within an index that people want to exclude, or a few sectors people want to focus on at the expense of others. This is fundamentally problematic.

“The trouble that I found with that style of investing is you are always kind of chasing your tail a little bit in the sense that people are always trying to debate ‘Oh, is alcohol good for investing? Not good? Is defence good or bad?’”

He noted that weapons and defence stocks were widely considered unethical until the war in Ukraine began. They then became a part of a national security theme.

“Right at the other end of the spectrum, you’ve got impact investing. What I love about it and the reason I launched a global impact equity fund is that authenticity around ESG,” Mr Balkrishna said.

“You’ve basically got to find companies delivering positive environmental and social impact. But more importantly, the minute you use the word ‘impact’ in a fund, the test that you’ve got to subject a company to get qualified as impact, one makes it very authentic. So it reduces the risk of greenwashing. It also makes you accountable. You have to report on and measure the impact, which is quite a bit different to other styles of ESG investing.”

Child exploitation and money laundering

There are plenty of examples of passive funds with ethical labels containing questionable investments.

Vanguard’s Ethically Conscious Australian Shares ETF (ASX: VETH) includes all four major banks, as does Russell Investments Australian Responsible Investment ETF (RARI).

VanEck’s MSCI Australian Sustainable Equity ETF (ASX: GRNV) has Westpac in its top 10 holdings.

A VanEck spokesperson told InvestorDaily that GRNV is a rule-based strategy, and that Westpac only came into the portfolio in February this year. Prior to that, it was prohibited from the fund due to 23 million breaches of anti-money and counterterrorism laundering laws.

An MSCI stock report dated 8 May 2023 shows Westpac scored three out of 10 (a pass) for “bribery and fraud”, three out of 10 for “governance structures” and two out of 10 (a pass) for “customer relations”. However, the major bank scored top marks (10 out of 10) for “environment” and “human rights and community”.

Piers Bolger, chief investment officer at Infinity Asset Management, told InvestorDaily that he sold Westpac following the 2019 AUSTRAC scandal, which led to the ousting of chief executive Brian Hartzer and chairman Lyndsey Maxsted.

In its 2019 Sustainability Performance Report, Westpac listed its supposed ESG credentials, such as working with its customers towards a net zero emissions economy and being part of the Australian Sustainable Finance Initiative.

However, the report did not include the major bank’s failure to stop one of its customers from wiring $40,000 to child exploitation syndicates in the Philippines from 2014 to 2018.

In 2020, Westpac paid a $1.3 billion penalty for more than 23 million breaches of anti-money laundering laws, the largest fine in Australian corporate history.

Greenwashing on the rise

“Many people just see a bank that isn’t bad. That’s why we have a sustainability thesis on every company that we look at,” Mr Bolger said.

“We know there is a hell of a lot of greenwashing going on. ASIC is finally waking up to that.”

The Australian Securities and Investments Commission (ASIC) is ramping up its enforcement of funds that aren’t true to label. Deputy chair Karen Chester was asked by a delegate at the Responsible Investment Association of Australasia (RIAA) conference on 11 May if the regulator was pushing too hard on the matter of greenwashing.

“The question is suggesting we hit the pause button until all the policies are in place and that is just untenable,” she replied.

“Firstly, greenwashing harm is happening here and now, and we have a job to do. Secondly, our prioritisation of sustainable finance and the investment task ahead. That’s required for decarbonisation and to respond to climate change and greenwashing is a corrosive agent for that.

“For us to just not act would be inconsistent with us making sustainable finance a priority. We will be out of step with other regulators if we stopped and paused. The first thing that happens when a securities regulator gets out of step globally is people that tend to do those sorts of misconduct come to that jurisdiction and we are encouraging them to come here and practice greenwashing.”

Revealed: The dark side of ethical ETFs

As the corporate regulator cracks down on greenwashing, InvestorDaily investigates the questionable stocks held in Australia’s largest ESG funds.

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