The passive investment industry needs to have better defined methodology
Thursday 18 Jul 2019 Author: Martin Gamble

Last week the Financial Times reported that the $500m Vanguard ESG US Stock exchange-traded fund (ETF) had invested in oil services company Schlumberger, pipeline company Kinder Morgan and oil refiner Marathon Petroleum, despite its ‘green’ label.

According to the company’s website, the fund seeks to track the FTSE US All Cap Choice index while excluding stocks screened for certain environmental, social and corporate governance (ESG) criteria.

Specifically the fund excludes investing in companies involved in adult entertainment, alcohol, tobacco, weapons, fossil fuels, gambling and nuclear power.

In response, Vanguard has said that it will update the description of the fund to better reflect the index methodology and exclusions. It apparently only excludes companies that own fossil fuel reserves and not oil services companies.

As Shares reported on 20 June, ESG funds are becoming increasingly mainstream, with figures from the Global Sustainable Investment Alliance showing global assets topped $30trn in 2018.

Without a well-defined methodology in place, the industry could easily be accused of labelling products in order to ‘tap into’ investment flows at the expense of transparency.

The combination of growing mass-market appeal and non-standardised benchmarks is a potentially toxic mix and the passive investment industry would be wise to address the issue sooner rather than later.

The investment industry has had its fair share of past mis-selling scandals; let’s hope another one isn’t brewing.

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