As people have become more interested and passionate about social justice causes, they want to invest their money in funds that are focused on these aspects. Environmental, Social, and Governance (ESG) is a term often associated with market funds. An ESG fund is one where each of the respective factors (environmental, social, and governance) has been combined into the investment process. There is a set of criteria a fund must meet to be considered ESG friendly. Exchange Traded Funds (ETFs) can be classified ESG friendly if all the holdings meet the set criteria.
BlackRock Inc. is an investment management corporation and is the largest asset manager in the world with $8.67 trillion in assets. iShares is a group of ETFs managed by BlackRock. Within the iShares, there is a group of ESG rated funds.
The ICLN exchange traded fund is composed of 33 different holdings with $5.1 billion in assets. The top 3 holdings with the most weight are Plug Power Inc. (PLUG), Enphase Energy Inc. (ENPH), and Verbund AG (VER) respectively. All of the holdings invest exclusively in renewable energy. Plug Power focuses on the development of hydrogen fuel cells, Enphase Energy looks at solar energy, and Verbund centers around hydropower. The ICLN ETF provides a diverse range of holdings in various renewable energies as seen with the top three.
I first looked into the company Plug Power because of its production in hydrogen fuel cells. Hydrogen is an element found in nature that is almost always attached to another element. Because of this, the bonds must be severed so hydrogen can be pure and used on its own. This process requires a lot of energy. Here is where my first question came in, is Plug Power producing green hydrogen? That is, are they reforming the hydrogenation process by using only renewable energy so there are no GHG emissions? Plug Power committed to producing 50% of their hydrogen via renewable energy by 2024. One of the ways they’re hitting this goal is through 2 acquisitions they went through during summer 2020. Plug Power acquired United Hydrogen Group Inc. and Giner ELX. Both of these companies are some of the most influential companies in green hydrogen production. With the acquisitions, Plug Power is on track to meeting their 2024 goal and becoming the largest green hydrogen companies in the United States. Ideally, the company would push to move their goal past 50% green hydrogen, but I am impressed with the steps they are taking to meet their initial goal.
The second largest holding in the ETF, Enphase Energy, is an energy technology based company headquartered in the Bay Area. Enphase produces residential solar panels and home energy storage solutions. They jump started the idea of microinverters which manage energy per panel rather than the whole array of panels. Enphase is the leading company in the microinverter market. Enphase has exceeded my expectations when addressing their ESG metrics. While reading their 2020 ESG report, I expected there to be a lot of fluff and unfulfilled promises; instead, Enphase gave several tangible examples of ways they are reducing their carbon footprint and environmental impact. Not only is the company providing sustainable products for consumers, but they are also reducing their impact in other ways. One interesting fact that stood out to me was that they provide rideshare and carpooling subsidies for US locations in order to help reduce transportation emissions. To learn more about their environmental impact you can read about it in their annual report. According to Forbes, the Enphase Energy stock is likely to report well over the coming years due to the Biden administration’s focus on climate change. Overall, Enphase Energy is a successful sustainable company.
Verbund AG is Austria’s leading electricity provider with almost 100% of their electricity being produced via hydropower. Any electricity not produced by hydropower is supplemented by wind and thermal energy making Verbund the “climate-friendliest electricity producer” in Austria. Because Verbund uses mostly hydropower, my first question was what type of hydropower? Verbund utilizes pumped storage power plants and run-of-river plants. The main issues posed with these sources of hydropower are the potential damages to the local environment and organisms living there. The habitats in these regions can be disrupted but the advantages of these systems seem to outweigh the cons in the end. I am very impressed that Austria’s leading electricity company is producing their energy solely through renewable methods. This is a huge win in terms of GHG emissions.
Based on the top 3 holdings, ICLN is looking to be a very clean investment.
In order for an ETF to be classified as sustainable or ESG focused, it must meet a required set of metrics. The one notable thing about ESG ratings is that they look at risk and not exactly what the companies in their holdings are doing to mitigate climate change. Essentially, BlackRock’s active investors are meant to integrate sustainability-related insights into their normal investing procedure in order to improve long-term risk adjusted returns. This means an ETF could be full of companies that are low risk when it comes to the impacts of climate change in the future, but the companies in the ETF are not necessarily sustainable in terms of reducing global environmental impact. BlackRock looks specifically at *investment processes, material insight, and transparency* for their ESG integration. This process is disappointing because you then need to look at each individual ETF to determine if the ESG labeling means it is actually sustainable.
BlackRocks iShares do provide data such as a fund's carbon footprint, but you need more information than just that to determine if the ETF as a whole is sustainable. You will likely have to do your own research on each ETF to determine its sustainability. The ICLN fund is labeled under the Thematic ESG option in the ‘Go Sustainable’ section of iShares. This means it is an ETF that pursues specific ESG or SDG issues. Altogether, the ICLN fund is sustainable; however, the process of classifying ETFs as ESG friendly needs improvement.
iShares are developed by BlackRock, as previously mentioned. BlackRock is one of the most influential and dominating asset management companies in the world. Because of this, it is important to factor in what the company is doing for their employees.
BlackRock has several initiatives focusing on diversity and inclusion within the company. Their main philosophy is “we should treat others as they would like to be treated.” This is somewhat of a cliche, but nevertheless, it shows they want employees to be treated with respect. They know not all people want the same things, so they indicate it is important to talk and listen to one another to achieve full inclusion. For the benefit of the employees, BlackRock has created several “employee networks” that focus on different backgrounds, social issues, and perspectives. These networks allow individuals to connect with one another in areas they identify with or are passionate about. Along with this, the company partners with 7 organizations to help in fostering diversity. BlackRock implemented a program called “Driving Better Decisions” which help leaders and managers mitigate bias in the workplace. Their website states that over 2,500 individuals have participated since 2015, but I would like to see a more updated statistic and overview of the program especially after the important social change movements we have witnessed since 2020. It seems that BlackRock hasn’t updated their diversity and inclusion goals recently, as they stated they want 30% female representation in senior management positions by 2020. I would really like to see if they hit this mark and if they plan to improve their goal in the following years.
BlackRock is an Equal Opportunity/Affirmative Action Employer and is committed to working with people with disabilities. A majority of companies are committed to these issues, so these two facts don’t necessarily distinguish BlackRock from any other company. BlackRock came under some scrutiny by the Committee of Worker’s Capital (CWC) due to their Stewardship model. In their report, they say BlackRock has a narrow-mind approach that lacks access to remediation efforts for workers whose human rights were violated. One of BlackRock’s five priorities set in 2017, is Human Capital Management (HCM). The CWC says the policy doesn’t directly “support freedom of association, collective bargaining or the elimination of forced labour.” Along with this, BlackRock has made their commitments to reducing environmental impact clear, however, they have not publicly discussed their efforts to help workers affected by the transition to a low-carbon economy. All this to say, BlackRock needs to be more transparent when it comes to their labor practices and human rights, and they need to clearly define their commitments and intentions to these issues.
BlackRock does well at fostering an inclusive and diverse workplace, but their human rights and labor practice policies need to be greatly improved. Overall, I would give a 1.75/3 planets.
*Overall Thoughts: 1.92/3 planets*
ESG rated funds can be tricky as I described under the ‘How it’s made’ section. Because the ICLN fund is focused solely on renewable energy, I would say it is sustainable and thus I would recommend investing in the ETF. However, when looking at other ESG labeled ETFs, it is important to look at the different holdings to see if the companies actually are sustainable. The process and criteria for which an ETF can be marked as ESG favorable, needs to be restructured so investors know they truly are investing in environmentally sustainable driven funds.