How Oil, Coal and Wal-Mart Became Part of 'Socially Responsible' ETFs
May 04 2017 - 5:59AM
Dow Jones News
By Asjylyn Loder
State Street Corp. launched its SPDR S&P 500 Fossil Fuel
Free ETF with much fanfare in December 2015, its debut timed to
coincide with the Paris climate talks and its credibility burnished
by support from the Natural Resources Defense Council, one of the
most prominent environmental lobbying groups in the U.S.
Despite the ETF's name, it owned stakes in, for example,
Transocean Ltd., the offshore-drilling company implicated in the
Deepwater Horizon oil spill; Southern Co., a utility that relies on
coal and natural gas for 80% of its generating capacity; and Valero
Energy Corp., a major gasoline refiner.
As demand for do-gooder investing increases, particularly among
women and millennials, fund managers are retooling their lineups to
include diversified funds that appeal to a wider audience. These
loosely-defined strategies offer a feel-good tilt while still
preserving broad market exposure, which muddies the difference
between responsible funds and their plain-vanilla peers.
The lack of industrywide definitions makes reliable statistics
hard to come by. The Global Sustainable Investment Alliance
estimates that assets pegged to environmental, social and
governance strategies, or ESG, ballooned to a record $22.9 trillion
at the start of 2016, making up 26% of professionally managed money
world-wide.
Yet money managers disclose few details about how they use ESG
criteria, according to a report from the alliance's U.S.
organization. Some analysts include solar and wind energy funds.
Others don't. Some funds adhere to 'biblical' values that critics
call homophobic. And some funds, like the State Street ETF, own
stock in companies that are blacklisted by competitors.
"It's a very slippery space," said Elisabeth Kashner, head of
ETFs for FactSet, a data and analytics firm. "There's no consensus
on what's ultimately good or bad, nor is there consensus on how to
measure it."
Last August, State Street changed the name to clarify the fund's
strategy of avoiding firms with coal, gas and oil reserves. It's
now called the SPDR S&P 500 Fossil Fuel Reserves Free ETF.
"There is no iron-clad, crystal-clear, broadly consensual,
industry definition of how to invest, or not invest, in fossil
fuels," said Chris McKnett, head of ESG investments at State
Street, who said the change was made for the sake of "precision and
clarity."
ESG investing traces its modern roots to the antiapartheid
divestiture campaign of the 1980s, which prodded companies to
withdraw from South Africa to protest the country's
institutionalized racial segregation. After apartheid was
dismantled, ethical investing focused on boycotting heavy polluters
and human rights violators.
As concerns about climate change increased, investors began
looking for ways to reduce the carbon footprint of their portfolios
without sacrificing diversification and performance. ESG became an
increasingly popular solution. Instead of using market value to
determine how much to allocate each company, like most traditional
indexes, the strategies weight their investments based on how a
company performs on ESG metrics. Some funds go a step further,
using financial criteria like revenue or dividends combined with
ESG scores.
Since the start of 2016, the ETF industry has launched 26 new
ESG funds, according to FactSet and XTF, two market analytics
firms. Firms, including Goldman Sachs Group Inc., State Street and
OppenheimerFunds, have also published research touting the
performance-enhancing benefits of ESG screening.
Some fund managers believe that ESG screening can weed out
companies with simmering scandals, said Sharon French, head of beta
solutions for OppenheimerFunds. She cited MSCI's July 2013 ESG
downgrade of Volkswagen AG due to corporate-governance problems,
more than two years before the Environmental Protection Agency
announced its investigation into emissions cheating.
Such strategies preserve diversification, but can make for
strange bedfellows. For example, the Columbia Sustainable Global
Equity Income ETF includes Valero Energy Corp. and Marathon
Petroleum Corp. among its top 20 investments; and, at one point,
the single largest holding of Oppenheimer's Global ESG Revenue ETF
was Wal-Mart Stores Inc., a company excluded from other ESG
strategies because of its history of labor problems, though that
may change as the company improves its ESG performance.
"Companies are the most powerful entities in the world, and they
can do harm or they can do good," said Mike Jantzi, chief executive
of Sustainalytics, a company that provides ESG analysis to fund
managers. "But good and bad with nothing in between wasn't
useful."
Write to Asjylyn Loder at asjylyn.loder@wsj.com
(END) Dow Jones Newswires
May 04, 2017 05:44 ET (09:44 GMT)
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