It was quite a PR comeback, considering BlackRock had been getting skewered in the press after its former head of sustainable investing, Tariq Fancy, penned a handful of damning op-eds calling most sustainable investing “PR spin” and a “deadline distraction” from climate change.

Nevertheless, the new BlackRock U.S. Carbon Transition Readiness ETF arrived to much praise. Its stated approach: investing in large- and mid-cap companies that “BlackRock believes are better positioned to benefit from the transition to a low-carbon economy.” Of course, believing a company is well positioned to benefit from the transition is one thing; seeing them actually lead the transition is another.

The fund has holdings in more than a dozen laggard energy companies, with less than 20% of near-term investment in the energy transition (see sidebar). Eight of its holdings have been actively blocking climate policies. It’s not just BlackRock, of course. A number of funds marketed as sustainable, low-carbon or ESG-aligned are heavily invested in many of the very same companies you’d see in conventional funds. Usually lots of Big Tech (Facebook, Apple, Google owners Alphabet) and a good lacing of Big Oil.

The Carbon Transition Readiness funds put a different spin on things. As the Financial Times noted, “Rather than exclude companies that rate poorly on climate-related metrics, the new ETFs take an underlying equity index – the Russell 1000 and MSCI All World ex-US index, respectively – and assign portfolio weightings that reflect a carbon transition readiness score.” In practical terms, that presumably means the fund chose to sink only US$2.7 million into Exxon but put $4.5 million into Chevron and $10 million into Kinder Morgan because of varying carbon transition scores.

Said BlackRock’s CEO, Larry Fink, “These funds will enable investors to understand which companies are transitioning faster than others.” Sorry, Larry, but did investors actually need these funds to understand that Exxon and Chevron are transitioning at a glacial pace?

“If this ETF is really named ‘Carbon Transition Readiness’ then I have to ask what we are transitioning to and what we are getting ready for?” said As You Sow CEO Andrew Behar. “Based on our analysis, this ETF ignores Larry Fink’s statement, ‘climate risk is investing risk,’ while doubling down on business as usual.”

We asked Tim Nash, founder of Good Investing, for his take. “Since these ETFs launched with so much money already committed, this is likely an active fund created for institutions who were facing pressure to lower their carbon risk exposure and wanted to take a small step in the right direction. However, these ETFs won’t go far enough for most activist investors.” For those looking to divest from fossil fuels, Nash suggests AGF Global Sustainable Growth Equity ETF or iShares ESG Equity ETF Portfolio.

Bottom line: look before you leap.

Fund spotlight:
BlackRock U.S. Carbon Transition Readiness ETF
What’s promised: This ETF invests in large- and mid-capitalization U.S. equity securities “tilting towards those that BlackRock believes are better positioned to benefit from the transition to a low-carbon economy.”

What’s inside: The fund is dominated by all the standard Big Tech firms found in conventional ETF holdings: Apple, Amazon, Alphabet, Facebook, the last two of which have been booted off the Corporate Knights Global 100 index because of red-flagged illegal activity. In fact, more than a quarter of this fund’s holdings trip our red-flag alarms, including manufacturers of harmful pesticides, major weapons contractors (think Honeywell and Raytheon) and Big Pharma laggards failing on offering fair access to medicines. Since this is a low-carbon transition fund, let’s break down which holdings trigger Corporate Knights climate-related flags:

• 14 energy companies with less
than 20% of their near-term investment in the energy transition, including Exxon, Chevron, Kinder Morgan and ConocoPhillips.
• 8 climate-policy-blocking companies,
including Berkshire Hathaway, Goldman Sachs and Valero, as well as a few energy companies mentioned above.
• 3 big brands selling industrial meat,
including Spam-king Hormel.
• 1 deforestation and palm oil laggard,
namely Kraft Heinz Co., which Global Canopy gives a big fat zero to when it comes to its overarching commitment on deforestation (a primary contributor to climate change).

BlackRock’s position: “LCTU leverages BlackRock’s proprietary climate analytics to analyze a company’s ability to thrive in the transition to a low carbon economy, resulting in a portfolio with almost 50% less carbon intensity than its Russell 1000 benchmark.” LCTD’s GHG intensity is said to be 18% lower than benchmark.

The post ESG BS Detector: Do new “green” funds support the carbon transition? appeared first on Corporate Knights.

Around the world, investment firms, corporations and governments are scrambling to respond to calls for increased climate action and societal justice with pledges to measure everything against an environmental, social and governance (ESG) yardstick. But in the ESG stampede, insiders warn that too many stocks are getting tossed into green funds without enough oversight.

There have been grumblings about “greenwash” in the sector for years, but Tariq Fancy turned it up to 11, so to speak, when the former chief investment officer for sustainable investing at BlackRock (the world’s largest asset manager), raked the industry over the coals in a March op-ed.

“Wall Street is greenwashing the economic system and, in the process, creating a deadly distraction. I should know; I was at the heart of it,” Fancy wrote in USA Today. In many instances, “existing mutual funds are cynically rebranded as ‘green’ – with no discernible change to the fund itself or its underlying strategies – simply for the sake of appearances and marketing purposes. In other cases, ESG products contain irresponsible companies.”

His charges were damning, but they weren’t news to those paying attention. Last year, UK-based ShareAction examined 75 of the most influential asset managers worldwide and concluded that “50 have a very limited approach to managing ESG risks, receiving either a D or E rating.” Though a third ranked higher than a B (BMO and HSBC Global Asset Management earned Bs, while RBC and Manulife scored Cs), BlackRock, tellingly, was slapped with a D.

Nonetheless, Hugh Wheelan, co-founder of Responsible Investor, says that Fancy is only partly right. “Do we face swathes of greenwash in ESG statements, fund compositions and company ‘assessments’? Yes, with caveats. Little of what goes into environmental funds is 100% green (nothing is), and ESG is not a science.” Still, he urged the public to reject easy cynicism and remain committed: “Now is the time to hold fund managers to account.”

At the heart of the problem is the lack of agreed-upon standards for qualifying for, say, an “ESG-aligned” investment fund. Though that’s starting to change. In March, the U.S. Securities and Exchange Commission announced a new Climate and ESG Task Force in its enforcement division, tasked with “proactively identifying ESG-related misconduct.” Across the pond, the EU’s new rules designed to stamp out ESG-fund greenwashing take effect in June.

Debate rages over whether that green taxonomy is too watered down or too tough to support higher-carbon companies as they transition to net-zero. Mark Carney’s take: “We don’t just need brown/green; we need 50 shades of green and we need a way to communicate more precisely.”

Most agree with Fancy about one thing: “We’re running out of time and need to accept the truth: To fix our system and curb a growing [climate] disaster, we need government to fix the rules.” Or rather, we need to turn up the pressure on government to fix the rules.

Fund spotlight:

BlackRock iShares MSCI ACWI Low Carbon Target ETF (CRBN)

What’s promised: This ETF “seeks to track the investment results of an index [composed of companies] with a lower carbon exposure than that of the broad market,” giving investors “exposure to a broad range of global stocks that are less dependent on fossil fuels.”

What’s inside: Traditional ethical investors might gasp when they see 15 makers of controversial weapons, including Lockheed Martin, nestled in this portfolio. Turns out even the world’s largest maker of bombs, missiles, fighter jets and nuclear subs has developed a low-carbon transition plan (net-zero thermonuclear warheads, anyone?).
Even if you generously assume the same holds true for the handful of for-profit prisons, harmful pesticide-makers and mining firms tied to severe environmental damage in this ETF’s portfolio, low-carbon purists will no doubt take issue with some of the fund’s most climate-contentious holdings, including:

• 6 thermal coal-burning companies
• 11 climate-policy-
blocking companies, including Berkshire Hathaway and Chevron
• 4 deforestation and palm oil laggards linked to clearcuts in the Amazon rainforest and Southeast Asia (deforestation is a primary contributor to climate change), and
• 6 industrial meat companies, including Tyson Foods, America’s largest beef, pork and poultry processor (animal agriculture is a significant contributor to climate change).

BlackRock’s position: BlackRock says the ETF’s MSCI weighted average carbon intensity (tons CO2e/$M sales) is just 64.74, significantly lower than the 178.5 average for benchmark MSCI ACWI Index. Whether that will convince climate-conscious investors that this fund deserves their attention remains to be seen.

Adria Vasil is the managing editor of Corporate Knights. She’s also the author of the bestselling Ecoholic book series.

The post ESG BS detector: iShares Low Carbon ETF appeared first on Corporate Knights.