Photographer: Daniel Acker/Bloomberg

Pay Close Attention to What's in Your Ethical Fund

  • ESG and environmental investing booms to $223 billion
  • Lack of standards for what counts as ethical starts G-20 probe

Thinking of putting your money into a fund that describes itself as ethical? You’d better read the fine print if backing Exxon Mobil Corp. and British American Tobacco Plc isn’t your idea of doing good.

QuickTake Sustainable Investing

The oil company accused of misleading investors by hiding evidence about climate change and Europe’s biggest cigarette maker are among the holdings of some of the 30 biggest funds that invest following environmental or social governance guidelines, according to data compiled by Bloomberg.

While some funds are strict about supporting only clean-energy producers, others buy securities from Big Oil to Big Tobacco along with consumer brands such as Unilever and Facebook Inc. The wide range of holdings is the result of each institution deciding on its own what meets the ethical threshold. Loosening that definition has helped ethical investing grow about 80 percent over the past five years to $223 billion, data compiled by Bloomberg show.

“The industry hasn’t done itself many favors in making sure people understand what’s what,” said Charlie Thomas, who manages 950 million euros ($1 billion) under Jupiter’s Ecology funds, which exclude oil and tobacco in favor of companies that have a solution for environmental issues. “The challenge that we have as a sector is to be very clear with the investor so they know what they’re actually buying. Not all ethical funds are the same.”

There’s no agreed definition on what an ethical fund should be. That has allowed to mushroom the number of funds saying they support companies guided by standards on environmental and social governance. There are no set criteria for how companies report performance on those metrics, and no regulator like the Securities and Exchange Commission has set out rules. 

The looseness of the system is a concern to the Group of 20 nations, which asked a panel led by Bank of England Governor Mark Carney to draw up a proposal for voluntary reporting standards that companies could follow if they chose. That’s likely to offer best practices to companies and accounting firms that draw up sustainability reports and release data through organizations such as the non-profit CDP and Bloomberg.

ESG fund strategies range from excluding only companies they score the worst in their industries on specific metrics to including only the best of their class. Some seek to spur change by working as activist shareholders. A few will invest only in companies that benefit the environment. The only way to tell the difference is to look at what the fund is holding.

No Simple Label

“There’s not a simple label you can slap on it to solve the problem,” said Greg Elders, an analyst at Bloomberg Intelligence in London tracking ESG data. “Clients think it’s a shortcut for seeing how sustainable a fund is.”

The Bloomberg survey found the number of environmentally friendly or ESG funds has more than doubled in the past decade to about 730. Of the top 30, at least six hold oil companies.

At Impax Asset Management Group, which runs a $568 million Environmental Markets fund, the number of companies that meet its rules has jumped to 1,500 from 250 in 1999, with the pool of firms eligible to be included growing to $4.1 trillion, according to Jon Forster, a portfolio manager at the firm.

Investors have benefited from the diversification of green funds. The MSCI KLD 400 Social Index has risen more than 225 percent from the March 2009 low, about as much as the S&P 500 Index. The gauge includes 400 companies, with Microsoft Corp., Procter & Gamble Co. and Verizon Communications Inc. having the biggest weightings.

Growth in the sustainable-fund business, regardless of how “green” some of its investments are, is set to continue. A boom in renewable energy investment along with tighter environmental rules and increasing interest from younger people are the main drivers, said Sarbjit Nahal, head of thematic investing at Bank of America Corp. in London.

“The word I would stress is ‘mainstream,’” Nahal said. “There’s been a huge change towards taking longer-term issues into account. This is a space that you want to be in.”

Here are some of the top 30 ESG funds that hold oil and tobacco:

TIAA-CREF Social Choice Equity Fund, with $2.8 billion under management

  • Tracks the U.S. stock market, giving “special consideration to certain social criteria,” according to the firm’s website.
  • Holdings as of June included Occidental Petroleum Corp., Schlumberger Ltd., ConocoPhillips, Marathon Oil Corp.
  • The fund’s approach is to “include companies that are ESG leaders among their industry and sector peers,” said Manica Piputbundit, an associate at TIAA Global Asset Management, which manages $889 billion including more than $18 billion in ESG funds.

KLP AksjeGlobal Indeks I, a $3.7 billion fund

  • Invests in stocks listed in developed markets in accordance to KLP’s guidelines for responsible investment. All coal and tobacco companies are excluded.
  • Holdings include Exxon, BP Plc, Monsanto Co. Exxon was excluded from 2004 until 2009, when it was involved in a bribery case.
  • The fund aims to achieve “positive change through active ownership,” said Annie Bersagel, responsible investment adviser at KLP.

DNB Global Indeks, a $1.4 billion fund

  • Avoids companies responsible for “grave harm to the environment” and that don’t meet DNB’s “minimum ethical requirements,” according to its website.
  • Holdings include Exxon, Chevron Corp. and mining giant BHP Billiton Ltd. Weapons, tobacco and pornography companies are excluded, as well as those miners and power producers that get 30 percent or more of their income from coal.

ACTIAM NV’s $1.3 billion Responsible Index Fund

  • Tracks the MSCI North America Index, investing “exclusively in shares that meet the ESG criteria, as formulated by ACTIAM,” according to its website.
  • Holdings include British American Tobacco and Royal Dutch Shell Plc. Weapon producers are among the companies excluded.
  • “There are a some products or activities that directly lead to exclusion without prior engagement, but otherwise we see exclusion as a last resort,” Maxime Molenaar, an ESG analyst at ACTIAM, said in an e-mail response to questions. “We would first try
    to achieve improvements in the companies’ behavior.”

Pax World Management LLC, which manages ESG funds including the $1.9 billion Pax Balanced Fund

  • The Balanced Fund selects the best assets from a social and environmental perspective relative to their peers, according to Pax Chief Executive Officer Joseph Keefe, who said he doesn’t see the need for more definitive criteria in ESG investing.
  • Holdings include Occidental Petroleum because of its high ESG ranking, based on Pax’s analysis.
  • “There are a variety of strategies within sustainable investing funds because there are a variety of issues that investors care about,” Keefe said. “You want to design diversified portfolios to provide investors with the opportunity to achieve market or above-market return.”

Amundi Asset Management’s Atout Euroland $1.4 billion fund.

  • Its goal is to outperform the MSCI Euro Index by investing at least 75 percent of its assets in euro-zone stocks based on socially-responsible and ESG criteria, in addition to financial criteria, according to the fund’s prospectus. Amundi goes by “best-in-class strategies” rather than banning specific industries, and excludes the worst ESG-rated companies in each of them, the firm said in an e-mailed response to questions.
  • Holdings include Shell and Repsol SA.
  • “A policy of investing in the most efficient and least polluting issuers and avoiding the least efficient, for example, encourages companies and sectors to improve working practices and should reward investors through exposure to the best managed businesses,” a media representative for the firm said. “Blanket bans switch off dialogue and reduce incentives for managements to change.”
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