The largest ESG ETF, BlackRock’s $22.5bn iShares ESG Aware (ESGU) product, is making progress on its thematic label.
However, its inflows may be stronger than its ESG practices, according to Bloomberg Intelligence (BI).
Inconsistencies in stock selection and sector allocation are becoming more important as regulators scrutinize ESG funds more closely.
There seem to be some conflicts between ESGU’s holdings and the methodology and marketing documents of the index it tracks.
“Our analysis finds it holds firms with ties to controversial weapons, which doesn’t follow the exclusion commitments of the tracked index,” said Adeline Diab, Head of ESG and Thematic Investing EMEA at Bloomberg Intelligence. “ESGU’s weight in oil and gas, and exposure to companies linked to oil sands, such as ConocoPhillips, raises more questions. Funds’ approach and rigor in embedding ESG will take on more importance as regulators focus on mis-selling.”
While MSCI’s USA Extended ESG Focus Index methodology targets peers with higher ESG ratings, subject to maintaining risk and return characteristics similar to the parent index, BI’s analysis still points to selection inconsistencies within sectors, with poorly rated firms from an ESG and financial perspective favoured over well-rated ones.
“Though ESGU may embed risk and returns characteristics in determining stock holdings beyond the fund’s sector-weight alignment to the benchmark, its allocations point to some divergences within selection, Bloomberg Intelligence believes. In several sectors, including energy, technology and financial services, companies showing both good ESG Scores (A or AA) and strong recommendations were excluded, such as NiSource, Dropbox or the Intercontinental Exchange, in favour of counterparts with lower ESG scores and ANR ratings, including NRG Energy, Palantir or Schwab.”
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