ESG funds panned as signs of ‘woke capitalism’

Political conflicts and a tightening regulatory environment prove burdensome for fund providers

ESG funds panned as signs of ‘woke capitalism’

Environmental, social, and governance (ESG) exchange traded fund providers in the US facing a toxic combination of challenges.

In addition to preparing for a slew of intricate new regulations from the Securities and Exchange Commission, they have also become embroiled in political and ideological fights that have seen ESG funds branded as an example of "woke capitalism," reported the Financial Times.

A resolution prohibiting pension fund managers from incorporating ESG factors into their investment strategies was passed in Florida on August 23. On August 24 Texas chided BlackRock and nine other publicly traded European financial groups for their "boycott" of the fossil fuel industry.

Around the same time, the SEC published the outcomes of two ESG-related consultations. One was on proposals to change the "Names Rule" to more precisely define how a fund's constituent investments should be reflected in its name, and the other was on proposals for stringent ESG disclosure requirements for investment advisers and investment companies.

Many respondents have supported the proposals, the Times said, because they aim to stop "greenwashing." But commenters have also raised concerns that they may be burdensome and prohibitively expensive for fund providers.

“With respect to the SEC proposals, I think that the proposals impose such high burdens on the industry that there is risk that they will significantly reduce the availability of ESG products, which I think is not a good result for the capital markets generally,” Georgia Bullitt, a partner with law firm Willkie Farr & Gallagher and expert on regulatory law for asset managers, told the publication.

Outside of the regulatory context, the US Forum for Sustainable and Responsible Investing (USSIF) asserted in a position paper that demand for ESG funds is still high in response to what it refers to as "politically motivated attacks" against ESG.

Contrary to claims made by many who are against the idea, the organization asserts that investing sustainably lowers risk and that ignoring ESG considerations would be a violation of an asset manager's fiduciary duties.

The US Energy ETF (DRLL) from Strive Asset Management and the ESG Orphans ETF (ORFN) from Constrained Capital are two examples of so-called anti-ESG funds that some ETF providers are promoting.

The US sustainable ETF market is facing significant challenges due to ongoing political conflicts and the industry's anticipation of the SEC's new regulations, which are anticipated as early as the second quarter of next year.

There were only 244 US-listed ESG ETFs holding a combined US$112 billion in assets at the end of July, according to Deborah Fuhr, founder of the consultancy firm ETFGI.

In comparison, Europe has 502 ESG ETFs with a combined US$236 billion in assets.