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Freetrade says investors could be ‘duped’ by loose ESG labels

·2-min read
An oil rig out at sea  (PA Archive)
An oil rig out at sea (PA Archive)

A City upstart is calling for more regulation of the term ‘ESG’ after its research turned up an instance of funds with the label investing billions in oil and gas.

Research by stock broking app Freetrade said vague terminology and a lack of strict regulation was helping companies hide what it called “dirty” holdings in portfolios labelled as ESG.

ESG stands for environmental, social, and governance, and has become a catch-all term for good corporate behaviour. For many, it has also become a byword for climate friendly investments.

“If you’re looking to invest green, you’re probably filtering and searching for funds labeled ESG,” said Gemma Boothroyd, an analyst at Freetrade.

While ESG funds screen out certain industries — such as arms and thermal coal — they do not necessarily have to exclude oil and gas, so long as companies in the sector are pursuing plans to reduce emissions.

Freetrade identified two exchange traded funds run by investment giant BlackRock that had fossil fuel holdings, for instance. An iShares euro ESG corporate bond fund had around €2.4bn invested in the sector at the time of the research. The fund had €1.7m of exposure to Exxon Mobil, the US oil giant that was this week grilled by Congress over claims it spread climate disinformation. Exxon executives denied the charges.

“Retail investors may feel duped,” said Boothroyd. “Investors trying to invest sustainably probably aren’t keen on supporting the companies with the biggest carbon footprints on the planet. The reality is, many accidentally are.”

BlackRock said it provided “full transparency” on fund holdings and the investment criteria of each fund. A spokesperson said it caters to investors with a “wide range of sustainable objectives, with some focusing on climate-related objectives and others focusing on other ESG themes or broad ESG considerations.”

Larry Fink, BlackRock’s founder, has pledged to make environmental concerns a top priority in the company’s active investment portfolios. Earlier this year BlackRock backed a shareholder rebellion at ExxonMobil over its climate policies.

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