The largest ESG ETF, BlackRock's $22.5bn iShares ESG Aware (ESGU) product, may be making progress on its thematic label but its inflows may be stronger than its ESG practices, according to Bloomberg Intelligence.
Inconsistencies in stock selection and sector allocation may become more important as regulators scrutinize ESG funds, it argued in an analysis report today (30 September).
Adeline Diab, Head of ESG and Thematic Investing EMEA at Bloomberg Intelligence, said: "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."
"Our analysis finds it holds firms with ties to controversial weapons, which doesn't follow the exclusion commitments of the tracked index. 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, our 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 said.
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.
Diab added: "Though BlackRock's iShare ESG Aware cut its smallest positions in the oil-and-gas sector - Valero and EOG Resources -- it still holds 12 companies, with the 2.72% weighting exceeding both the S&P 500's 2.63% and MSCI USA's 2.44%. The 12 companies account for 349 million tons of CO2 emissions and represent over 6.8% of the total 2019 U.S. carbon emissions, with Exxon Mobil and Chevron representing 3.7% of emissions, based on BP Statistical Review data.
"In addition, though exposure to oil sands can be difficult to track, ConocoPhillips remains a large player even after its $13.3 billion asset sale in 2020. It holds a 7.4% stake in Cenovus, a tar-sands leader that it sold the assets to -- not in line with the methodology of the MSCI ESG index that ESGU tracks."