ESG BS Detector: Do new “green” funds support the carbon transition?

We look under the hood of BlackRock's new Carbon Transition ETF to see if it delivers on its low-carbon promise

Illustration by Matthew Billington

BlackRock Launches Biggest ETF Ever – and It’s Green,” trumpeted Yahoo Finance. “BlackRock secures largest-ever ETF launch as green investing wave builds,” heralded the Financial Times. By the time the world’s largest investment house unveiled its U.S. Carbon Transition Readiness ETF (LCTU) in early April, investors had poured a cool US$1.25 billion into it. That didn’t just make it the largest launch of any ESG-aligned (environmental, social, governance) ETF to date, it was the “biggest launch in the ETF industry’s three-decades history,” as Bloomberg noted. Another $500 million was invested in its sister fund, BlackRock World ex U.S. Carbon Transition Readiness ETF (LCTD).

It was quite a PR comeback, considering BlackRock had been getting skewered in the press after its former head of sustainable investing, Tariq Fancy, penned a handful of damning op-eds calling most sustainable investing “PR spin” and a “deadline distraction” from climate change.

Nevertheless, the new BlackRock U.S. Carbon Transition Readiness ETF arrived to much praise. Its stated approach: investing in large- and mid-cap companies that “BlackRock believes are better positioned to benefit from the transition to a low-carbon economy.” Of course, believing a company is well positioned to benefit from the transition is one thing; seeing them actually lead the transition is another.

The fund has holdings in more than a dozen laggard energy companies, with less than 20% of near-term investment in the energy transition (see sidebar). Eight of its holdings have been actively blocking climate policies. It’s not just BlackRock, of course. A number of funds marketed as sustainable, low-carbon or ESG-aligned are heavily invested in many of the very same companies you’d see in conventional funds. Usually lots of Big Tech (Facebook, Apple, Google owners Alphabet) and a good lacing of Big Oil.

The Carbon Transition Readiness funds put a different spin on things. As the Financial Times noted, “Rather than exclude companies that rate poorly on climate-related metrics, the new ETFs take an underlying equity index – the Russell 1000 and MSCI All World ex-US index, respectively – and assign portfolio weightings that reflect a carbon transition readiness score.” In practical terms, that presumably means the fund chose to sink only US$2.7 million into Exxon but put $4.5 million into Chevron and $10 million into Kinder Morgan because of varying carbon transition scores.

Said BlackRock’s CEO, Larry Fink, “These funds will enable investors to understand which companies are transitioning faster than others.” Sorry, Larry, but did investors actually need these funds to understand that Exxon and Chevron are transitioning at a glacial pace?

“If this ETF is really named ‘Carbon Transition Readiness’ then I have to ask what we are transitioning to and what we are getting ready for?” said As You Sow CEO Andrew Behar. “Based on our analysis, this ETF ignores Larry Fink’s statement, ‘climate risk is investing risk,’ while doubling down on business as usual.”

We asked Tim Nash, founder of Good Investing, for his take. “Since these ETFs launched with so much money already committed, this is likely an active fund created for institutions who were facing pressure to lower their carbon risk exposure and wanted to take a small step in the right direction. However, these ETFs won’t go far enough for most activist investors.” For those looking to divest from fossil fuels, Nash suggests AGF Global Sustainable Growth Equity ETF or iShares ESG Equity ETF Portfolio.

Bottom line: look before you leap.

Fund spotlight:
BlackRock U.S. Carbon Transition Readiness ETF
What’s promised: This ETF invests in large- and mid-capitalization U.S. equity securities “tilting towards those that BlackRock believes are better positioned to benefit from the transition to a low-carbon economy.”

What’s inside: The fund is dominated by all the standard Big Tech firms found in conventional ETF holdings: Apple, Amazon, Alphabet, Facebook, the last two of which have been booted off the Corporate Knights Global 100 index because of red-flagged illegal activity. In fact, more than a quarter of this fund’s holdings trip our red-flag alarms, including manufacturers of harmful pesticides, major weapons contractors (think Honeywell and Raytheon) and Big Pharma laggards failing on offering fair access to medicines. Since this is a low-carbon transition fund, let’s break down which holdings trigger Corporate Knights climate-related flags:

• 14 energy companies with less
than 20% of their near-term investment in the energy transition, including Exxon, Chevron, Kinder Morgan and ConocoPhillips.
• 8 climate-policy-blocking companies,
including Berkshire Hathaway, Goldman Sachs and Valero, as well as a few energy companies mentioned above.
• 3 big brands selling industrial meat,
including Spam-king Hormel.
• 1 deforestation and palm oil laggard,
namely Kraft Heinz Co., which Global Canopy gives a big fat zero to when it comes to its overarching commitment on deforestation (a primary contributor to climate change).

BlackRock’s position: “LCTU leverages BlackRock’s proprietary climate analytics to analyze a company’s ability to thrive in the transition to a low carbon economy, resulting in a portfolio with almost 50% less carbon intensity than its Russell 1000 benchmark.” LCTD’s GHG intensity is said to be 18% lower than benchmark.

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