Want to save this page for later?

NextGen Magazine


ESG Funds Gain on Back of Big Oil Companies

Chris Gaetano
Published Date:
May 3, 2021

Social responsibility exchange-traded funds (ETFs), which pledge to consider a firm's environmental, social and governance (ESG) impact, have made great gains over the years. But the recent success of many of these funds can be traced to rebounding big oil companies, which are not what one generally thinks of when considering eco-friendly investments, Bloomberg reported. Major ESG funds have rallied by between 30 and 46 percent since this time last year, boosted by major gains of oil companies roaring back after a dismal 2020; ExxonMobil, for example, is now up by 23.2 percent, and Chevron is up by 12.2 percent. It is a bitter irony for the funds, which aim to reduce threats to the planet.

Bloomberg attributes the fact that these funds hold stakes in oil companies to a quirk in the way the indexes are built—their individual methodologies do allow big oil companies in the pool. One fund's gauge, for example, screens out firms involved in civilian firearms, controversial weapons, tobacco, thermal coal and oil sands, but not oil companies. BlackRock said that one of its funds looks for top ESG performers in many different sectors and added that it offers alternative funds that specifically screen out fossil fuels. (This does not, however, address the issue of the first fund providing capital to these companies regardless of which one investors want to buy). This speaks to another point raised in the Bloomberg piece, which is that not everyone wants to invest full tilt in ESG, and some investors may only want to get their feet wet a little; funds that include oil companies might appeal to that customer base.

However, the situation also speaks to the issue that there seems to be little consensus or regulation on what socially responsible investing actually means. Given the multiplicity of standards and frameworks, comparability between different companies' efforts can be difficult, making greenwashing more of concern. It is for these reasons that we are seeing more movement toward convergence: a coalition of five major organizations have been working to better integrating their respective frameworks and standards; two of these five organizations, the International Integrated Reporting Council and the Sustainability Accounting Standards Board, also announced a merger, also citing the need for more synergy; and the IFRS Foundation has been considering lending its considerable legitimacy to a new Sustainability Standards Board as a way to further rationalize the space.