The war in Ukraine has exposed a weakness in ESG funds as they invested more in Russia
Environmental, social, and governance, or ESG, funds have become a top trend on Wall Street, promising to boost returns while bettering the world by avoiding countries prone to pollution, corruption, and even war. But the strategy backfired on two of its biggest advocates — JPMorgan Chase & Co. and BlackRock Inc.
Investors who bought a $2.1 billion BlackRock emerging-markets bond fund that tracks a JPMorgan ESG index have lost 4.74% since the invasion began, compared with a 3.78% loss for investors in its traditional emerging-markets fund, according to data from S&P Capital IQ. The ESG fund underperformed because it had relatively large allocations to Russian and Ukrainian government bonds and was slightly more sensitive to U.S. interest-rate moves.
“It becomes a question of whether the index owners are allocating capital appropriately,” said Fergus McCormick, director of sovereign research at Emerging Markets Investors Alliance, a nonprofit promoting good governance. “We had a lot of signals that some investors and analysts were taking the Russia risk seriously, but the industry as a whole was lulled into complacency.”
