Ever since the Securities and Exchange Commission changed reporting rules around developing and marketing "ESG" funds, issuers have been forced to get a lot more specific about which aspect of environmental, social, or governance goals their funds are targeting. Some are even dropping any direct connection to the "ESG" label altogether. I can't say that I blame them. Much of what passes for ESG investing is a cluster of companies pledging to do better in 10, 20, or more years but carrying on business as usual for now.
JPMorgan (JPM) is one issuer that is hearing the call. The firm has admirably pivoted its exchange-traded fund marketing away from ESG greenwashing toward more realistic positioning like their Carbon Transitioning US Equities ETF (JCTR) , or their Climate Change Solutions ETF (TEMP) . They continued this trend recently with the launch of three new actively managed funds, the Social Advancement ETF (UPWD) , the Sustainable Consumption ETF (CIRC) , and the Sustainable Infrastructure ETF (BLLD) . All three of these funds have a 49-basis point expense ratio so a shareholder with $1,000 invested over a calendar year would pay $4.90 in fees over that period.
Feel Good Solutions
As I mentioned earlier, JP Morgan has stopped trying to insult our collective intelligence by plastering ESG labels over everything. These fund names take a more nuanced approach to positioning the strategies as "doing well by doing good," but let's take a look under the hood and see what kind of exposure these funds provide investors.
Reading through the fund prospectus, UPWD explains the strategy as selecting companies that are "facilitating social and economic advancement and are thus well-positioned to benefit from growing demand for investments that are furthering social advancement." This language is interesting because it reads as if the strategy is kind of like a social advancement momentum play. Reading further there is language that describes the activities that the issuer believes act as catalysts for social and economic advancement, which include companies that provide essential amenities, affordable housing and infrastructure, health care and wellbeing, education and training talent, attainable financing, and access to the digital ecosystem.
Looking through a current list of holdings as of Sept. 8, 2022, I see some names like British headquartered Airtel Africa Plc., which provides mobile telecom and mobile money services that seem to live up to this goal but the bulk of names in this portfolio are tried and true blue-chip names like Microsoft Corp (MSFT) , Alphabet (GOOGL) , Mastercard (MA) , Visa (V) , Nike (NKE) , even CSX Corp (CSX) and Walmart, but Wal-Mart Mexico (local ticker WALMEX) instead of Walmart (WMT) . I'm sure all of these companies have elements of their business that play into this social advancement approach, but to be clear, general altruism and the drive to level the economic playing field are not the primary motivations of these companies and certainly not what drives their quarter-to-quarter earnings announcements.
Still, regardless of positioning this portfolio provides exposures that, for the most part, align with the sector exposures of the S&P 500 Index, the largest differences being a 50% underweight in technology, an almost double weight in financials, a large underweight in consumer discretionary names and a 50% overweight in consumer staples. Clearly, the portfolio managers are making some bets not just on names but on the broader economy as well.
CIRC's prospectus employs similar "well positioned to benefit from the growing demand for such investments" when describing the main activities of companies that "are developing solutions that help preserve natural resources, improve resource use, or reduce waste." These activities include activities related to water systems, agriculture and food, production technologies, materials and design (all sustainable, of course), and recycling and re-use.
Again, there are some names in this portfolio like Finnish alternative fuel and feedstock developer Neste Corporation (local ticker (NESTE) ), and decking manufacturer Trex Company (TREX) , which manufactures all its products from recycled plastics but there are also names like Nestle S.A., which has been voted one of the worlds top plastic polluters for at least the past 4 years running. Other names that are most likely sound companies from a fundamental perspective, but just don't seem to fit the bill from a strategy perspective include Nike (NKE) (again), Taiwan Semiconductor (TSM) , and NXP Semiconductors (NXPI) .
BLLD's prospectus states that the portfolio managers are looking for companies that will "benefit from growing demand for sustainable infrastructure," which is different from the other funds that seem more interested in catching a wave. The segments of interest for this fund include electricity, renewable, transport, water, digital, medical, and social housing and education infrastructure, and what they bill as sustainable logistics. There doesn't seem to be any big surprises in the holdings of this fund but given the scope of the strategy, I'm surprised there are only 60 names in the portfolio. Of the three new funds, I like BLLD if only because the strategy is looking to tie fund performance directly to the results of the activities of the underlying companies instead of the demand for shares of those companies based on broad investor sentiment
Wrap it up
As I mentioned earlier, I am happy to see that issuers are moving away from the kinds of broad ESG statements that ultimately raise questions of greenwashing. While JP Morgan has made some moves to position these products with specific goals, it's not clear to me that these goals are what will drive share price appreciation, except for the infrastructure focused BLLD. As I've said in other articles, I'm not saying the holdings in UPWD or CIRC are fundamentally bad companies, but I just don't understand how they match up with the overall stated strategies of social advancement or sustainable consumption. Still, if you look at these funds from a purely fundamental perspective, then they're worth a closer look.