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WSJ: Fossil Fuels Common in Top ESG Funds; Study Hits “Incoherence” in ESG Sector

According to the Wall Street Journal, eight of the 10 biggest U.S. sustainable funds hold positions in oil-and-gas companies and while these investments may be small, the holdings may run contrary to the funds’ disclosures. The report notes that while these top funds exclude gun makers, casino operators and tobacco companies from their portfolios, they have been slow to reduce exposure to fossil fuels. The ESG sector is in a period of record inflows, according to Morningstar, and a drive for returns may be causing firms to remain in positions, such as energy stocks, that may produce gains during a downturn, according to the WSJ.  The report intensifies the debate on what should or should not be included in an ESG portfolio. A new academic study from professors at Brooklyn Law School, Fordham University School of Law, and Georgia State College of Law points to wide variations and definitional inconsistencies in the ESG sector and argues that there is “little coherence in the ESG fund concept.” The professors argue that a lack of transparency and an absence of regulation prevent both actively and passively managed ESG funds from consistently delivering on their objectives and suggests that investors should act cautiously when considering purchasing an ESG fund. “The opacity of the ESG investment market imposes a significant burden on investors to distinguish between ESG investments and identify the appropriate ESG strategy and outcome (for them) within the range of options.”  The paper also notes that the lack of regulatory review gives fund managers and index providers “unchallenged leeway…. all shielded from public review.”

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