We’ve seen this before. Funds promote themselves as investing along some standard other than explicit financial performance. But then fail to follow the screening they profess to be using.
We saw that with BNY Mellon in 2002. It represented or implied in various statements that all investments in the funds had undergone an ESG quality review, even though that was not always the case.
We saw that with the Inspire ETFs. It represented that the ETFs followed biblically responsible investing. The SEC found it wasn’t properly screening investments.
The latest is WisdomTree. It’s a registered investment adviser to three exchange-traded funds (the “ESG Funds”) that it marketed as incorporating environmental, social, and governance (“ESG”) factors. It purported to have the capability to screen out the securities of companies that had any involvement in fossil fuels and tobacco.
WisdomTree contracted with vendors to provide the rating and research to identify companies involved in fossil fuels. The first vendor offered five data sets that addressed different aspects of fossil fuels activities: “Arctic Oil and Gas Exploration,” “Thermal Coal,” “Oil Sands,” “Shale Energy,” and “Oil and Gas.” WisdomTree only subscribed to three of the five. That left a big hole in its screening
WisdomTree contracted with a second vendor to get screening for fossil fuels companies. The second vendor did not have a data set for “fossil fuels.” It’s data set was the “Energy Sector.”
As you might expect, the ETFs ended up owning interests in companies that dealt with fossil fuels: Utility companies that distributed natural gas to residential and industrial customers, a major natural gas distributor that has also had ownership interests in shale gas extraction projects, a specialty chemical company that provides chemicals for use in offshore and onshore drilling, company that owns natural gas distributors, etc.
The problem is poor definition of the screening subject int he fund documents and the failure to implement good screening. As a result of an SEC exam WisdomTree revised the fund documents to more accurately describe the screening.
Do what you say you’re doing to your investors.
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