Economy and Society:

Economy and Society is Ballotpedia’s weekly review of the developments in corporate activism; corporate political engagement; and the Environmental, Social, and Corporate Governance (ESG) trends and events that characterize the growing intersection between business and politics.

ESG Developments This Week: On Wall Street and in the private sector

Fund managers argue ESG comes at a cost

Just over a month ago, the Financial Times reported on the story of Unilever and the frustration some of its investors argue its ESG focus is causing:

“Unilever has “lost the plot” and its management prizes displaying its sustainability credentials at the expense of running the business, according to influential fund manager Terry Smith.

The founder of Fundsmith, a top-10 shareholder in Unilever whose stellar long-term record has helped him amass a large retail following, used his annual letter to investors on Tuesday to hit out at the global consumer goods group.

The maker of Dove soap, Hellmann’s mayonnaise and Magnum ice cream has set out ambitious climate and social targets and is trying to prove that sustainable business does drive superior financial performance.

Smith, a veteran stockpicker who runs the £28.9bn flagship Fundsmith Equity Fund, wrote: “Unilever seems to be labouring under the weight of a management which is obsessed with publicly displaying sustainability credentials at the expense of focusing on the fundamentals of the business.”

He said that while “the most obvious manifestation of this is the public spat it has become embroiled in over the refusal to supply Ben & Jerry’s ice cream in the West Bank . . . there are far more ludicrous examples which illustrate the problem”….

Smith added: “A company which feels it has to define the purpose of Hellmann’s mayonnaise has in our view clearly lost the plot. The Hellmann’s brand has existed since 1913 so we would guess that by now consumers have figured out its purpose (spoiler alert — salads and sandwiches).””

Roughly a week later, the Financial Times reported again on frustration within the industry at perceived ESG-fixations, citing various investors who are upset with various fund providers for changing the focus of their funds’ investments, moving away from traditional, passive investment strategies and to ESG-based formulas and indices:

“The switch by many passive funds in Europe to indices with an environmental, social and governance tilt has left many professional fund selectors feeling wrongfooted, industry observers say.

Funds increasingly are including ESG considerations in their objectives as an ever-larger proportion of flows moves into sustainable products.

Some of Europe’s largest exchange traded fund providers, including iShares, DWS and BNP Paribas, have changed indices on some of their products….

But not all professional fund buyers are happy with passive funds being repurposed as sustainable.

Jose Garcia Zarate, associate director, passive strategies at Morningstar, said one portfolio manager he spoke to was “upset” that an ETF the company held had switched to an ESG index, which excluded energy company Shell.

The selector wanted to maintain exposure to the Anglo-Dutch oil and gas giant, said Garcia Zarate.

Some think investing in stocks excluded from ESG indices could be advantageous at a time when other investors are divesting from these companies, he added.

Chris Chancellor, senior director, global insights at Broadridge, said views of this kind among European fund selectors were “not common but not unknown”….

[Detlef] Glow [head of Europe, the Middle East and Africa research at Refinitiv Lipper] said ETF providers “need to be careful when making the decision to repurpose an ETF” as this can have “massive impacts on the relationship between the ETF promoters and their investors”.”

Finally, last week (February 16), the Financial Times reported that one of the most hyped of all ESG funds recently launchedthe MSCI Global Climate Select fundis near “on the brink of failure”:

“A UN-backed green investment fund is on the brink of failure three months after its launch during the Glasgow climate summit because institutions including big banks never delivered expected seed funding.

The MSCI Global Climate Select exchange traded fund was unveiled in early November. Trading under the ticker NTZO, it excludes fossil fuel companies and boosts holdings of companies with lower carbon emissions.

The fund has amassed less than $2mn and is likely to be wound down as soon as the end of March without further investment, said Ethan Powell, founder of Dallas-based Impact Shares, the fund manager. He said Impact Shares has been spending about $25,000 a month to manage the ETF.

Bank of America, Citigroup and Santander, all GISD members, pledged to provide seed money to NTZO but have refused until other investors step up, said Jim Healy and Sudip Thakor, former Credit Suisse bankers who are involved with the fund.

“It is a classic case of everyone just going through the motions,” Thakor said….

Impact Shares and the UN announced the new ETF in November as global leaders met in Scotland for the COP26 climate summit. Fani Titi, chief executive of South African banking group Investec and a GISD member, was quoted in a press release saying that the climate ETF “created a real opportunity for investors to finance greater good”.”

Fidelity, nevertheless, remains undeterred

Fidelity Investments has launched four new ESG fundsthree mutual funds and one exchange-traded fund (ETF)in the hope of capturing a larger share of the ESG trend in capital markets. MarketWatch has the details:

“The Fidelity Sustainable International Equity Fund (FSYRX), Fidelity Sustainable Emerging Markets Equity Fund (FSYJX), Fidelity Sustainable Multi-Asset Fund (FYMRX), and Fidelity Sustainable High Yield ETF FSYD, +0.28% will target companies with strong ESG ratings, according to the Boston-based asset manager. 

“We’re constantly monitoring where companies are relative to another on their ESG journey,” said Pam Holding, co-head of equity and head of sustainable investing at Fidelity, in a phone interview. “These are actively-managed strategies.” 

Fidelity will use a “proprietary reading” of how companies stack up in areas such as diversity, carbon emissions and cybersecurity by combining static ratings and a “forward-looking” view through quantitative and bottom-up, fundamental analysis, according to Holding. While the Fidelity Sustainable Multi-Asset Fund is “sort of a fund of funds that will use a combination of active and passive” investing, she said the other three new funds are “100% actively managed.”

The four new funds bring Fidelity’s total lineup of sustainable mutual funds and ETFs to 15.”

Greenwashing a major ESG concern for industry, reports Institutional Investor

In a piece published on February 17, Institutional Investor magazine reported that the ESG movement remains, in its view, rife with confusion, lack of transparency, and what some observers see as potential fraud. As a result, greenwashing has become the watchword of the industry:

“Greenwashing is often in the eye of the beholder, depending largely on one’s sustainable investing philosophy, according to PitchBook analyst Anikka Villegas.

In an analyst note published Monday, Villegas wrote that the growth in environmental, social, and governance investing has come with confusion and disagreement about the definitions of terms like ESG, sustainable investing, and impact investing. As a result of this lack of clarity, many venture capital and private equity firms have been accused of greenwashing — claiming to practice ESG and sustainability but not following through on those promises.

While some firms are guilty of this deception, Villegas argued that many of the greenwashing accusations are a product of a difference in philosophy: Investors have different ideas about what sustainability, ESG, and impact look like in practice….

According to Villegas, purists consider it greenwashing when any firm that claims to practice ESG invests in socially or environmentally harmful industries, or in companies that don’t contribute to sustainability.

“In many cases, greenwashing accusations from purists are likely to be false positives, where the accused ESG approach simply aligns with a different philosophy and is in fact transparent about its intentions and execution,” Villegas wrote….

It’s unlikely that investors will ever agree on the adoption of a single philosophy, Villegas wrote, making it challenging for investors to identify which strategies qualify as ESG.”

Morningstar strips funds, deemed unworthy, of their ESG label

Meanwhile, just under two weeks ago (February 10), Bloomberg reported that Morningstar Inc., one of the biggest names in ESG ratings, had taken steps to strip several funds of the ESG labels, deeming them unworthy of the title:

“ESG funds representing more than $1 trillion in assets aren’t delivering on their stated environmental, social or governance goals, according to one of the main researchers tracking the market.

A forensic analysis of the industry resulted in the ESG tag being removed from more than 1,200 funds, or roughly one in five, according to Morningstar Inc.’s classification system. The findings feed into concerns that asset managers are still making misleading claims on the extent to which their allocations are doing the planet or its inhabitants any good.

Hortense Bioy, global head of sustainability research at Morningstar, told Bloomberg that sustainability tags were taken off “funds that say they consider ESG factors in the investment process, but that don’t integrate them in a determinative way for their investment selection.” 

Bioy said funds that used “light or ambiguous ESG language” were targeted in the purge. 

The correction marks something of a line in the sand for an investment trend that has enjoyed stratospheric growth, much of which took place before regulations were in place. It also offers a glimpse of the scale of potential greenwashing as the ESG label goes from niche to mainstream.

Morningstar’s calculations suggest that vast sums of money have been mis-allocated, hobbling efforts to fight global warming and inequality. The numbers also indicate that a sizeable group of investment managers may be vulnerable to regulatory reprimands.”

In the spotlight

Punching up at ESG

On February 17, Punchbowl News, “a membership-based news community founded by journalists and best-selling authors,” announced that it would be launching what it called a new ESG platform:

“Punchbowl News is launching a next-generation ESG platform “The Punch Up” with Target as our inaugural partner. This accountability-centric approach will focus on some of the biggest issues facing the world today. During the initial year, we’ll bring together leading voices on racial equity and sustainability to convene a much-needed dialogue between the private and public sectors.”

Punchbowl offers few details about its plans, while promising to “have a lot more to say on this in the coming days and weeks!”