As Greenwashing in ESG Runs Rampant, ARK Promises Transparency

Cathie Wood’s ARK Investment Management has proposed an exchange-traded fund (ETF) to the Securities and Exchange Commission (SEC) that promises “transparency.” The fund appears to be Wood’s take on a product in the highly-debated environmental, social and governance (ESG) category. 

The ARK Transparency ETF seeks to follow an index “designed to track the price movements of stocks of approximately 100 companies that receive high scores for transparency,” the company said in its SEC filing. 

The index will exclude alcohol, banking, chemicals, confectionery, fossil fuel transportation, gambling, natural gas, oil and tobacco, ARK revealed. Exclusion of certain industries is a key trait of ESG investment products. 

Transparency, for ARK, has become a key pillar of its business and investment strategy, as demonstrated by the ARK Transparency Standards, a document released last month that outlines the company’s commitment to investors. 

“ARK is very proud of showing their holdings every day and their trades every day, it’s like their thing,” said Eric Balchunas, ETF analyst for Bloomberg Intelligence. “If you think about the word ‘transparency,’ versus ESG, transparency is just a very, very favorable word to most people.” 

Despite the controversy surrounding the category, ESG ETFs saw a record inflow of $83.04 billion in the first half of 2021, according to ETFGI data. Inflows for the first six months of 2021 came in just shy of the total inflows for 2020, which was $88.95 billion. 

There are no guidelines set by the SEC regulating what funds can be labeled ESG, meaning issuers can select any holdings, and investors looking to do good should check under the hood. 

Greenwashing running rampant?

London-based non-profit IndustryMap conducted a review of the ESG industry in August and reported that more than 70% of climate-themed investment funds failed to live up to standards set in the Paris Agreement. 

“​​A key finding of the research is the wide spectrum of terms used to describe climate-themed strategies in listed equity funds and the resulting difficulty, even within financial databases, of comparison between them,” the report noted. 

Funds are being greenwashed, or presented in a way that exaggerates or misrepresents the investment strategy to be more environmentally conscious than it really is, IndustryMap said. Asset managers that failed to live up to the Paris standards include UBS, BlackRock and Invesco.

The largest ESG ETF is the First Trust Preferred Securities & Income ETF with $7.54B in assets under management, according to data from ETF.com. The fund’s top holdings include US government bonds, US dollars, Wells Fargo and JPMorgan Chase. 

The Nuveen ESG International Developed Markets Equity ETF, with $144.46 million in assets, has holdings in Nestle, Sony and L’Oreal. 

“ESG is subjective. If you or I opened up an ESG ETF, for example, we may have different views on whether Facebook should be in there,” said Balchunas. “There’s a lot of hot button stocks that are in many of the ESG ETFs, and then on the flip, there are certain ESG ETFs that exclude stocks that would be considered by many to fit ESG.”

ARK’s fund filing follows the launch of the new Viridi Cleaner Energy Crypto-Mining & Semiconductor ETF, a fund devoted to investing in environmentally friendly cryptocurrency mining efforts. Top holdings include Hut 8 Mining Corp and Marathon Digital. 

While Viridi’s clean energy fund got the green light from the SEC, investors and issuers are still awaiting a decision about a cryptocurrency fund. Many analysts believe that a bitcoin futures ETF may receive approval before a spot traded product. 

“We think that there will be Bitcoin futures ETFs launched in the middle to later part of October,” said Balchunas. “For spot, I think maybe next year at some point. Again, assuming the futures go well, the market-makers are reporting back that it works and if there’s some kind of regulatory framework for bitcoin in general, that would also help.” 

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