ESG funds pump billions into fossil fuels as SEC looks to crack down on ‘misleading’ investors

Mega asset managers are all-in on ESG investing that favors the environment and social justice politics, but their labels for such funds tell a different story: ESG investors also are buoying fossil fuels with billions of dollars.

Republicans have zeroed in on investment firms such as BlackRock and Vanguard for their ESG engagement, or what conservatives call woke capitalism.

The funds and other major financial institutions also face pressure from the left and ESG advocates who say asset managers should ditch investments in energy sources such as coal, oil and natural gas, or at least be more transparent in disclosing to clients that their ESG-named funds aren’t entirely climate-friendly.

“Even Vivek Ramaswamy would like [BlackRock’s] ESG funds,” said Andrew Behar, CEO of the nonprofit shareholder advocacy organization As You Sow, referring to the Republican presidential candidate and self-described anti-woke crusader.

There is nearly $3.1 billion invested in fossil fuels across 10 of BlackRock’s largest ESG-labeled funds that each have at least $1 billion or more in assets, according to data compiled by As You Sow’s fund tracker and analyzed by The Washington Times. The fossil fuel share of the individual funds ranged from 2.8% to 12%.

One of BlackRock’s lower-valued ESG funds has a fossil fuel share as high as 21%. Just 11 of the 38 funds with ESG sustainability mandates are free of fossil fuel investments, according to As You Sow data.

There is more than $100 million invested in fossil fuels across Vanguard’s top three ESG funds that each have more than $1 billion in assets. Only one of its seven funds with sustainability mandates does not include fossil fuels.

BlackRock and Vanguard declined to comment for this report.

Environmental, social and corporate governance investing, or ESG, weighs risks such as how climate change will impact companies’ bottom lines. Republicans say BlackRock, Vanguard and other investment firms are using ESG to destroy the fossil fuel industry. Democrats and environmentalists say the money is further fueling climate change.

Asset managers say they lack control over the companies included in certain types of funds. Third parties determine the ESG credentials of companies, and the metrics are highly subjective without a uniform standard for ESG labeling.

Prospective clients receive certain fund disclosures. The third-party analysts can identify ESG traits if the company is working to lower its emissions or has a diverse board.

Asset managers say their ESG-named funds that include fossil fuels are not deceiving investors because they primarily include ESG priorities.

The Securities and Exchange Commission disagrees.

It is finalizing changes for how funds are named to crack down on “misleading or deceptive fund names.” Current rules require that 80% of a fund include investments that align with its name. It’s unclear when the rules will be finalized.

ESG’s subjective metrics have come under increased SEC scrutiny. The agency created an ESG task force in 2021 to identify misconduct.

The SEC’s enforcement division sent document requests and subpoenas to several unidentified asset managers this year regarding ESG marketing, according to recent reporting by the Financial Times.

Vanguard was not one of the target firms, said a source familiar with the matter.

Transparency advocates such as As You Sow’s Mr. Behar, who is pro-ESG, say it’s no accident that asset managers use what he calls misleading names because the current SEC rules have enabled them.

“The clever folks at the big asset managers said, ‘Oh, so that’s the rule, so we can be fossil-free but 19% coal,” he said. “There’s a problem with fund naming. They’re misleading. People who want to invest in fossil fuels are confused and people who don’t want to are confused. Everyone is confused.”

Republican-led states’ laws to divest state funds and pension programs from pro-ESG firms and funds can be confusing.

Texas has banned 348 ESG funds from doing business with the state because they “boycott energy companies.” One of them is BlackRock’s nine Lifepath ESG target date funds. Each fund contains $123,000 to more than $261,000, or 4% to 7% of the entire funds, in fossil fuel investments.

In a video posted to the company’s website, the head of BlackRock’s portfolio management group, Rich Kushel, said $320 billion is invested on behalf of clients globally in energy, including fossil fuels and renewables. BlackRock told The Times this year that its fossil fuel portion stood at more than $200 billion.

Mr. Kushel said the ESG objective is about client choice and making money.

“Our investment view is carbon-intensive companies will continue to play a crucial role in the economy for the foreseeable future under any plausible transition path, alongside investments in new energy technologies and steps to mitigate methane and carbon emissions — all of which will create new investment opportunities for our clients,” Mr. Kushel said. “Ultimately, the choice of where to invest rests with our clients.”

Correction: A previous version of this story misstated the number of ESG funds offered by Vanguard.