{"id":2522,"date":"2020-03-03T20:54:49","date_gmt":"2020-03-04T00:54:49","guid":{"rendered":"http:\/\/blogs.bard.edu\/mba\/?p=2522"},"modified":"2020-03-03T21:08:27","modified_gmt":"2020-03-04T01:08:27","slug":"your-esg-fund-financing-fossil-fuels","status":"publish","type":"post","link":"https:\/\/blogs.bard.edu\/mba\/2020\/03\/03\/your-esg-fund-financing-fossil-fuels\/","title":{"rendered":"Your ESG fund may be financing fossil fuels, but not in the way you think it is"},"content":{"rendered":"
\"Silhouettes<\/a>
Image by MonikaP from Pixabay<\/figcaption><\/figure>\n

Environmental, social, and governance (ESG) funds have recently been called out for including holdings of oil and gas companies<\/a> in their portfolios. ESG funds, often referred to as sustainable funds, are intended to be socially responsible investments, however what constitutes \u201csocially responsible\u201d is still up for debate.<\/p>\n

Many consumers, particularly millennials<\/a>, perceive investing in fossil fuels to be in conflict with social responsibility, but it seems that ESG investment managers don\u2019t always agree. A recent article by the Wall Street Journal reported that eight of the top 10 largest sustainable funds for being invested in oil and gas companies<\/a>, distorting the reality of what many retail investors may believe they are achieving by putting their money into supposed \u201csustainable funds.\u201d While this may be frustrating to some, the article also points out that the oil and gas composition of these indexes often make up less than 4% of the whole portfolio. Plus, there are a growing number of fossil free indexes<\/a> and funds available on the market.<\/p>\n

But what about investments in the man behind the curtain, those who are directly supporting the fossil fuel companies?<\/p>\n

\u00a0<\/strong>JPMorgan Chase (JPMC), the \u201c<\/strong>worst banker on climate change<\/strong><\/a>\u201d, is often found in the top 10 holdings of ESG equity funds <\/strong>of some of the largest investment management companies. Rainforest Action Network (RAN) has identified JPMC as the largest banker of fossil fuels by a wide margin. Since the Paris Agreement JPMC invested over $195 billion in fossil fuel projects<\/a> (from 2016-2018 at the time of the report), with over a third of that spend going directly financing fossil fuel expanders. This year, JPMC was originally selected as one of the lead underwriters of the Saudi Aramco IPO<\/a> before the oil company turned to local bankers to complete the process.<\/p>\n

So, would you want JPMC in your sustainable investment fund?<\/strong><\/p>\n

Looking at the holdings of a variety of ESG funds by some of the largest investment managers and ESG funds on the market, JPMC is often found among the top 10 holdings (see Table A for examples). While JPMC is the worst of the bunch, they are not the only culprit of financing fossil fuels. Other bad banking actors according to RAN\u2019s 2019 Banking on Climate Change<\/a>\u00a0report are also commonly found in ESG funds, including Bank of America and Citi Group.<\/p>\n

 <\/p>\n

Table A. <\/em><\/strong>Examples of<\/em> JPMorgan Chase and other fossil fuel-financing banks in ESG funds<\/em><\/p>\n\n\n\n\n\n\n\n\n\n
Fund Name<\/strong><\/td>\nJPMorgan Chase Holdings (Rank & Weight*)<\/strong><\/td>\nOther Top Fossil Fuel-Financing Banks in Top 20 Holdings (Rank & Weight*)<\/strong><\/td>\n<\/tr>\n
BlackRock<\/strong><\/a> iShares ESG MSCI USA ETF<\/a><\/td>\n#6 \u2013 1.38%<\/td>\nBank of America: #12 \u2013 1.05%<\/td>\n<\/tr>\n
BlackRock<\/strong><\/a> iShares MSCI ACWI Low Carbon Target ETF<\/a><\/td>\n#6 \u2013 0.85%<\/td>\nBank of America: #13 \u2013 0.60%<\/td>\n<\/tr>\n
Bloomberg<\/strong><\/a> SASB US Large Cap Value ESG Ex-Controversies Select<\/a><\/td>\n#1 \u2013 5.65%<\/td>\nInformation unavailable<\/em><\/td>\n<\/tr>\n
SPDR<\/a> S&P <\/strong><\/a>500 Fossil Fuel Reserves Free ETF<\/a><\/td>\n#6 \u2013 1.68%<\/td>\nBank of America: #12 \u2013 1.11%<\/td>\n<\/tr>\n
Parnassus<\/strong><\/a> Core Equity Fund<\/a>**<\/td>\nN\/A<\/td>\nBank of America: #9 \u2013 2.9%<\/td>\n<\/tr>\n
Domini<\/strong><\/a> Impact Equity Fund<\/a><\/td>\nN\/A<\/td>\nBank of America: #10 \u2013 1.42%<\/p>\n

Citi Group: #20 \u2013 0.90%<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

* As of December 3, 2019
\n<\/em>** <\/em>Largest ESG ETF as of YE 2018<\/em><\/a><\/p>\n

 <\/p>\n

All fund managers aim to balance risk and return, but ESG fund managers must also factor in some level of ESG impact. Impact, though, is harder to measure. Risk and return are quantifiable through traditional financial data. Quality environmental and social data is harder to come by, even though demand for ESG from consumers and investors is growing rapidly. Organizations like CDP<\/a> and the Global Reporting Initiative<\/a> provide methods and tools for disclosing environmental and social information for investors. Other firms like the Global Impact Investing Network<\/a> and MSCI<\/a>, among many others, help investors interpret this information, but the market for this data is still early, inconsistent, and nuanced.<\/p>\n

With this in mind, some managers think it makes sense to include JPMC and other big fossil fuel-funding banks in the top ranks of ESG funds. Financials is often among the top sector weights of many ESG funds, along with Information Technology and Healthcare. When you consider the environmental impacts of these sectors, they are inherently less environmentally intensive than other sectors due to their relative limited draw on energy or other natural resources for their direct business operations (i.e. compared to Materials or Industrials). JPMC<\/a> is also often a top performer from a financial returns standpoint in the Financials sector, as Apple and Microsoft<\/a> are in the Information Technology sector.<\/p>\n

It’s clear why JPMC and other big banks are an attractive bet for fund managers, but due to their heavy hand in supporting the fossil fuel industry, there are large externalities excluded from their fund performance. This isn\u2019t just in terms of environmental impact, but also financial risk<\/a>. While the financial sector is waking up to these risks, the industry has a long way to go before their true environmental and social impacts are properly accounted for on the books.<\/p>\n

So how do you ensure your money is invested with your values?<\/strong><\/p>\n

At the end of the day, ESG investing is all about values. But values are subjective. Here are some tips to make sure you consciously invest your money where your mouth is:<\/p>\n