By Henrike Hein, Jan. 28, 2023
What are ETFs and are they actually sustainable?
Many people rely on ETFs in the hope that they will be able to invest their money sustainably. ETFs advertise with promising tags such as "ESG Screened". But are they what they say they are?
ETFs (abbreviation for Exchange Traded Funds) are exchange-traded funds that passively track certain indices, such as the German Share Index (DAX) or the Dow Jones. If the index changes, the composition of the fund also changes automatically, without a fund manager having to do anything. Due to the automatic nature of ETFs, their annual fees are significantly lower than actively managed funds. There are now many ETFs that also specialize in certain topics, such as sustainability.
Unfortunately, the low-cost funds without active management also have disadvantages.
Here is what to consider:
- Greenwashing: Every second sustainable fund invests in oil, coal and aviation. Handelsblatt, together with the Dutch networks Follow the Money and Investico and eight European media houses, evaluated more than 800 funds labeled as green. This project, called "Great Green Investment Investigation," also looked at 547 funds tradable in Germany. It came to light that money was not only flowing into particularly sustainable companies, but also, for example, into Lufthansa, RWE and Rural, an aluminum and coal producer from Russia.
- No participation: Owning shares gives investors the right to participate in the company's annual general meeting and to cast their votes. When investing in ETFs, this right is given to the issuer, which makes major players in the financial market, such as Black Rock, more and more influential and thus stands in the way of the democratization of the stock market.
- Not customizable: Those who want to reflect their own values and demands in their investments or want to include existing investments in their personal portfolio can only do so to a limited extent with predefined ETFs.
How can it be that ETFs traded as sustainable are nonetheless not sustainable?
This is due to the so-called best-in-class principle, according to which companies are selected that are considered to be the most sustainable in their industry. However, sectors are not categorically excluded. For example, a „low carbon“ ETF includes companies such as Amazon, Nestlé or Facebook. Although these service or tech companies have lower CO2 emissions than their competitors in the same sector, they probably do not meet the sustainability requirements of most investors. For example, the Dow Jones Sustainability Index and some other sustainability funds invest in BP, which caused a huge environmental disaster with its exploded Deepwater Horizon oil rig. Just because an ETF advertises a promising green name does not mean that it invests in sustainably operating companies or that they have a green business model.
If you want to check whether your ETFs are really sustainable, we recommend the pageFaire-Fonds. We also use the site of the NGOs Facing Finance and Urgewald as a source of data for our sustainable investments.
More information about investing in shares provides the blog: „Are investments in shares safe?“