Exchange-traded funds built on environmental, social and governance themes have attracted record inflows this year, as the U.S. grapples with the pandemic, devastating weather and racial unrest.

But for anyone looking to invest with conscience, it might pay to check under the hood.

Inflows to ESG ETFs have surged to $22 billion so far in 2020, already about three times the 2019 total, according to data compiled by Bloomberg. The trouble is, the label isn’t policed by U.S. regulators, and no one can quite agree how to weigh ESG components -- resulting in some surprising fund holdings.

BlackRock Inc.’s iShares ESG Aware MSCI USA ETF (ESGU) includes stakes in Exxon Mobil Corp. and Chevron Corp., for example, while its biggest holdings are in tech companies under investigation for monopoly abuse. Stocks in Xtrackers MSCI USA ESG Leaders Equity ETF (USSG) include McDonald’s Corp., which has come under scrutiny for its treatment of employees.

“If you go in there thinking that you want to ‘woke’ up your portfolio, and you see those companies, you’re going to be like, ‘What? That’s not what I signed up for,’” said Eric Balchunas, ETF analyst for Bloomberg Intelligence.

Top Dogs
Three BlackRock products dominate the ESG fund market and make up the majority of total assets. BlackRock’s iShares ESGU, iShares ESG Aware MSCI EM ETF (ESGE) and iShares ESG Aware MSCI EAFE ETF (ESGD) account for about $13.4 billion of year-to-date flows.

BlackRock works with MSCI Inc. to set its funds’ inclusion and exclusion rules. MSCI, which scores ETFs based their holdings’ environmental, social, and governance risks and opportunities, rates ESGU and ESGD as AA, one level below the top ranking, while ESGE is rated A.

ESGU’s index screens for companies involved in civilian firearms, controversial weapons, tobacco, thermal coal and oil sands. A peer fund from Vanguard Group takes a stricter approach: Its $2.2 billion ESG US Stock ETF (ESGV) excludes companies involved in adult entertainment, alcohol, tobacco, weapons, fossil fuels, gambling and nuclear power.

The ESG category is inherently subjective, said Ben Johnson, Morningstar’s global director of ETF research. While investors may want to “tip their hat” to ESG, many don’t want to fall too far behind benchmark performances.

About 53% of respondents to a recent Nuveen survey cited better returns as their reason for choosing responsible investing. Only 51% were more interested because of this year’s natural disasters.

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