End of Week Notes:

BlackRock lowers ESG fees/Corporations behaving badly/Vanguard climbs aboard on climate disclosure

Jon Hale
Jon Hale
Aug 25, 2017 · 5 min read

BlackRock announced last week it is lowering fees on three iShares ESG ETFs. The move raises the question, how much should an ESG index fund cost? The answer is: not as much as iShares, and other passive providers, have been charging, particularly for core U.S. exposure.

In an investment world where low fees reign and where an S&P 500 index ETF costs a scant 0.04%, it’s hard to explain to clients that an ESG version of the S&P 500 — the closest being iShares MSCI KLD 400 Social ETF (DSI) — is going to cost them 12 and half times more, even though in this case we’re only talking about an actual difference of 46 basis points. That difference, however, is more than enough to offset the DSI’s performance deficit versus the S&P 500. Over 10 years through June 30, the iShares Core S&P 500 ETF (IVV) gained an annualized 7.13%, which was just 26 bps better than that of DSI’s 6.87% annualized gain.

So let’s imagine DSI’s expense ratio had been 26 bps lower over the past decade, or 24 bps. At that fee level, DSI would have matched the return of IVV even though DSI still would have cost six times more. For BlackRock, the lower fees collected would likely have been offset by the fund’s more attractive return/expense profile, which would have increased AUM from better returns and higher inflows.

Notably, BlackRock hasn’t lowered fees for DSI, opting instead to lower those of iShares MSCI USA ESG Optimized ETF (ESGU) to 0.15% from 0.28%. ESGU is less than a year old and has only $5.3 million in assets, so the move is a nudge to investors towards that fund to make it viable on a long-term basis.

The other fee reductions are for two other new “optimized ESG” funds: iShares EAFE ESG Optimized ETF (ESGD) and iShares EM ESG Optimized ETF (ESGE). These have each garnered a fairly impressive $100 million in assets in their first year and have performed well, with ESGE beating and ESGD narrowly trailing its conventional counterpart, despite both having higher fees. “Optimized” for these ETFs means that a conventional MSCI index is tilted towards companies with positive ESG characteristics while maintaining similar risk/return characteristics.

Corporations Behaving Badly I: Wells Fargo has lost 70 advisor teams since the scandal

After nearly a year the impact of Wells Fargo’s fraudulent account scandal remains significant. In an era where reputation is exceedingly important, a lot of damage has been done to the company’s brand. In June, Barron’s reported that WFC was dead last in its investor survey of America’s most respected companies. Since then, there have been additional problems including some involving Wells Fargo Advisors.

If you are a financial advisor, you want your affiliation to be one that adds trustworthiness to your own brand rather than a red flag waving for every client and potential client. That could be why, according to Investment News, over the past year, Wells Fargo Advisors has lost upwards of 70 advisor teams overseeing nearly $20 billion, while gaining a baker’s dozen with less than $2 billion.

When a scandal overtakes a big company, every smaller subsequent transgression becomes newsworthy and therefore gets amplified, bolstering the “corporation behaving badly” narrative, and lengthening the memories of customers. We haven’t reached the long-term impact yet with Wells Fargo, but there is no sign of bounce-back in the stock so far.

Corporations Behaving Badly II: Study shows Exxon misled the public about climate science

Interesting paper published this week in the peer-reviewed journal Environmental Research Letters by Harvard professors Geoffrey Supran and Naomi Oreskes. The pair examined a set of ExxonMobil documents, including peer-reviewed publications by Exxon scientists, non-peer-reviewed publications, internal documents, and public “advertorials” about climate change. Their findings:

“Our assessment of ExxonMobil’s peer-reviewed publications and the role of its scientists supports the conclusion that the company did not “suppress” climate science — indeed, it contributed to it.

“However, on the question of whether ExxonMobil misled non-scientific audiences about climate science, our analysis supports the conclusion that it did.

“In public, ExxonMobil contributed quietly to the science and loudly to raising doubts about it.”

Here’s a schematic from the paper that describes the findings:

Vanguard on board with climate risk disclosure

One of the public benefits of investors pressing companies on climate risk disclosure is that it would make it hard for companies to mislead the public the way Exxon did. (It appears that Exxon has largely given up on casting doubt on climate change in public.) If a company were making a public disclosure to shareholders of their assessment of climate risk, it would be impossible to turn around and say something else on the topic in public, and much harder to side against climate change in political and lobbying activities.

Following State Street Global Advisors and BlackRock, Vanguard has now started pressing companies to disclose risks associated with climate change. Vanguard joined SSgA and BlackRock earlier this year to urge Exxon to disclose how climate change and the 2 degrees scenario would affect its business. With the big three’s support and with shareholder resolutions urging climate risk disclosure passing with majority votes at Exxon and Occidental Petroleum this year, all companies with significant carbon footprints have been served notice that shareholders expect them to disclose on climate risk.

Climate risk disclosure is in the broader public interest as it can add to our understanding of the economic, social and environmental impacts of climate change. At the same time, corporate disclosure will benefit from other assessments of climate risk, like this report from professors at UC-Berkeley, estimating the economic impact of unmitigated climate change across the U.S.

The map reflects the uneven distribution of economic impacts of unmitigated climate change based on county-level research. (Graphic by Solomon Hsiang and co-authors of “Estimating economic damage from climate change in the United States” in the journal Science.)

Have a great weekend. We’re headed to Thalia Hall in Chicago to see The Dave Rawlings Machine.

The ESG Advisor

Incorporating sustainability and impact into your investments

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Jon Hale

Written by

Jon Hale

Global Head, Sustainable Investing Research, Morningstar. Views expressed here may not reflect those of Morningstar Research Services LLC. or its affilliates.

The ESG Advisor

Incorporating sustainability and impact into your investments

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