Two of the hottest equity market trends are headed for a clash as some ESG investors are having second thoughts about blank-check firms that have flooded the market.

Early signs show that money managers wedded to environmental, social and governance themes are reluctant to buy into special-purpose acquisition companies before a target has been identified. That could potentially cut SPACs out of an investment class that’s on course to exceed $53 trillion by 2025, according to Bloomberg Intelligence.

Sanford C. Bernstein analysts are among those questioning whether blank-check listings are a good fit for investors seeking to direct capital toward businesses and activities that support a greener and fairer society. Amundi SA, Europe’s largest asset manager, says it’s reluctant to hand over its clients’ money to third-party SPAC sponsors.

“Does the prospect of buying into an acquisition vehicle before it has made its investment sit oddly, from a governance perspective, with the surge in ESG-driven investing?” analysts at Bernstein led by Inigo Fraser-Jenkins asked in a note on Wednesday.

For some investors, the answer to that question is yes.

“From an ESG perspective, it is quite difficult to invest in pre-deal SPACs,” said Ross Klein, founder and chief investment officer of Changebridge Capital, adding that without proper insight into the target acquisition, there is no way to assess the environmental or social impact of the business.

“There is an interesting tug of war at play between the two trends,” he said. It’s once a deal has been announced that there’s opportunity to review initial financial disclosures and talk to management, customers and competitors, he said.

SPACs are blank-check investments because there isn’t “good visibility on where the money will go in future; for this reason, they are just not an institutional way of investing money,” said Fabio di Giansante, head of large-cap European equities at Amundi.

The Surge
Those concerns haven’t stopped a flurry of SPAC listings, especially in the U.S. Since the start of 2020, blank-check companies have raised about $140 billion, according to data compiled by Bloomberg. And only a handful of these have been in Europe.

Typically, sponsors—well-known executives, or even private equity or venture capital firms—create a SPAC with no actual business other than to take the cash it raises to invest in another firm that has yet to be identified. If no target is found within its two-year lifespan, the blank-check firm is dissolved and investors get their cash back. In case of a takeover, shareholders can either hold on to their shares or redeem their holdings if they don’t like the deal.

With those options available, not all market players see pouring funds into SPACs as going against ESG principles.

Investors can question the people running the vehicle about the type of target, and can sell if they don’t like the acquisition the SPAC makes, said Gavin Launder, a fund manager at Legal & General Investment Management. “Lack of transparency about the end target doesn’t necessarily make these vehicles ESG-incompatible.”

Going Green
Additionally, some SPACs are riding the ESG theme, looking to directly cash in on the flood of money pouring into green investments. ESG Core Investments BV raised 250 million euros ($303 million) this month in the first IPO of a sustainability-focused blank-check company in Europe.

SPACs that have listed so far have completed more deals in technology than any other sector, with energy and utilities lagging at the bottom end, although acquisitions in these industries are heavily exposed to renewables, according to Bernstein.

Still, the rush of SPAC listings, surpassing highs seen in early 2000s, has some investors concerned about the quality of the offerings coming to market.

Investors should study the track-record of the sponsoring team and evaluate the attractiveness of the targeted sector before putting money in a blank-check firm, said Daniel Pinto, chief executive officer of Stanhope Capital.

“What’s worrying is the ease with which people, even those without a public track record or a demonstrated capacity to invest well, can raise money in SPACs,” he said, adding that the traditional IPO process puts more regulatory requirements on issuers.

This article was provided by Bloomberg News.