If you build it, never mind. Bloomberg reports today that the Impact Shares MSCI Global Climate Select ETF (ticker NTZO), which was launched last fall in tandem with the United Nations’ COP26 summit in Glasgow, has since gathered a measly $3 million of assets, a fraction of the $100 million sum needed to cover administrative costs. Barring a miraculous cash influx by the end of the month, the fund is facing liquidation, Ethan Powell, founder of Impact Shares, warns.
NTZO, which tracks the MSCI ACWI Climate Pathway Select Index and aims “to maximize exposure to companies that can potentially benefit from opportunities arising from the transition to a lower-carbon economy and increase exposure to companies that are setting science-based emission reduction targets or commit to reduction targets,” is off 15.4% in the year-to-date through yesterday, compared with the S&P 500’s 13.5% drop.
As the ETF launched last year with the backing of the U.N.’s Global Investors for Sustainable Development Alliance, a collective of 30 captains of industry controlling an aggregate $16 trillion in assets, that paucity of financial commitment leaves some sponsors thoroughly vexed. “I’m discouraged that you get these high-profile companies and the CEOs involved in an organization that they say trumpets $16 trillion of firepower, and they didn’t contribute a dime,” Jim Healy, former Credit Suisse banker turned initial investor in the fund, lamented to Bloomberg. “It’s a failure of collective action.”
On the bright side for NTZO backers, misery loves company. Investors pulled an aggregate $2 billion from equity-focused ESG funds last month, data from Bloomberg show. Not only is that the largest monthly outflow on record, but it marks the first such net withdrawal in any month since early 2019. Yet even that downshift represents a drop in the bucket; upwards of $68 billion has poured into the ESG realm over the past two years.
Enhanced government scrutiny may crimp additional fundraising efforts. Yesterday, German police raided the offices of Deutsche Bank and its DWS asset management arm as part of an investigation into so-called greenwashing, or making false claims over the environmental bona fides of various investment products.
That probe, similar to a stateside undertaking from the Department of Justice, reportedly focuses on allegations made by former global head of sustainability Desiree Fixler, who alleged last year that while DWS claimed €459 billion ($487 billion) in ESG integrated assets under management in its 2020 annual report, an internal audit revealed prior to publication that ESG compliant assets represented “only a small fraction” of that sum. Sure enough, DWS reported just €115 billion in “ESG assets” in its 2021 annual report, or a quarter of the previous year’s total.
In fairness, the criteria for sustainability remain something of a moving target. An analysis last month from the Review of Finance found that correlations between ESG ratings from a quintet of agencies ranged from 0.38 to 0.71. That’s well below the 0.92 correlation between credit ratings assigned by Moody’s, S&P and Fitch.
Beyond the inherent subjectivity within the category, shifting market conditions have yet to cover the nascent asset class in glory. Among the 556 ESG funds tracked by Morningstar, only four showed a positive performance over the first four months of the year and the cohort lagged the non-ESG indices they track by an average of 2.67% through April 30. What’s more, ESG funds charge 65 basis points in annual fees on average, Morningstar finds, compared to a 41 basis point expense ratio for the average non-ESG ETF.
Even dyed-in-the-wool sustainability true believers are having second thoughts. On May 10, BlackRock’s Investment Stewardship office released a paper previewing its planned shareholder votes for 2022. While the investment behemoth, which counted nearly $10 trillion in assets as of March 31, voted in favor of 47% of ESG-focused shareholder proposals last year, the firm is “likely to support proportionally fewer this proxy season than in 2021, as we do not consider them to be consistent with our client’s long-term financial interests.” In particular, initiatives which “implicitly are intended to micromanage companies,” will now get the thumbs-down, as will “those that are unduly prescriptive and constraining on the decision-making of the board or management, call for changes to a company’s strategy or business model, or address matters that are not material to how a company delivers long-term shareholder value.”
That measured approach stands in marked contrast to the sweeping proclamations found in BlackRock CEO Larry Fink’s 2020 letter to his c-suite colleagues (emphasis in original):
Climate change has become a defining factor in companies’ long-term prospects. Last September, when millions of people took to the streets to demand action on climate change, many of them emphasized the significant and lasting impact that it will have on economic growth and prosperity – a risk that markets to date have been slower to reflect. But awareness is rapidly changing, and I believe we are on the edge of a fundamental reshaping of finance.
Indeed, climate change is almost invariably the top issue that clients around the world raise with BlackRock. From Europe to Australia, South America to China, Florida to Oregon, investors are asking how they should modify their portfolios. They are seeking to understand both the physical risks associated with climate change as well as the ways that climate policy will impact prices, costs, and demand across the entire economy.
These questions are driving a profound reassessment of risk and asset values. And because capital markets pull future risk forward, we will see changes in capital allocation more quickly than we see changes to the climate itself. In the near future – and sooner than most anticipate – there will be a significant reallocation of capital.
As ever, markets make opinions.