The gush of incoming money into ESG focused funds has prompted some funds to make cosmetic changes to qualify for the “ESG” tag

Funds focused on ESG (environmental, social and governance) factors received a record $5.5 billion in inflows from investors.

During 2019, inflows in the first half ended June 30 have already amounted $8.9 billion.

Prospectus tinkering rather than genuine ESG

Some opportunistic funds, which were not ESG funds to start with, simply rubber-stamped their prospectuses as ESG and included a lot of fluff on socially responsible investing. However, they did not change their holdings to align with the new fund mandate.

According to Morningstar, out of the $161 billion invested in ESG funds as at end-2018, funds worth $72 billion were such ‘repurposed’ funds.

Examples include:

• Goldman Sachs adding ESG criteria to its International Equity Fund, now the Goldman Sachs International Equity ESG Fund.
• The Putnam Multi-Cap Growth Fund was reinvented and renamed as the Putnam Sustainable Leaders Fund, focusing on corporate sustainability metrics alongside its regular stock selection criteria.
• The Putnam Multi-Cap Value Fund became the Putnam Sustainable Future Fund.
• Aberdeen, J.P. Morgan and Morgan Stanley added “ESG considerations” to the prospectuses of many of their funds, without changing the portfolios.

ESG for real or not?

“It’s important to ask questions of the fund manager or the representatives of the fund firm to really understand whether ESG is really core to the fund’s manager’s process, or whether it’s just something that’s added on as a paragraph in a perspective or a page in a pitchbook,” says Daniel Kern, chief investment strategist at Boston-based TFC Financial Management.