Should The SEC Ban ESG Funds? - ESG Orphans

Mark Neuman, CIO and founder of Constrained Capital, talks with Chris Carosa of Forbes on the impact ESG funds have in the overall landscape of their respective industries. Neuman highlights sustainability ESGs stating, “70-80% of ESG funds hold Amazon, which has the top global carbon footprint and is the #3 holding at ESGUU +1.8% and ESGV +1.6% (Blackrock’s and Vanguard’s ESG flagships respectively).”

Well, ESG funds need to start telling the truth. Same with Coke and Pepsi, top contributors to Type II diabetes/obesity costing the USA over $1TLN/year yet Nuveen’s ESG flagship fund owns KO/PEP as the top 2 holdings. There’s no consistent measure of E, S, or G. They make it up as they go, telling everyone ESG and being good is costless and returns are better. This has been proven by finance luminaries and academia, yet few admit it. Constrained Capital is unabashedly honest about it, telling everyone. We created a product to capitalize on the coming ESG unwind. The truth shall set you free, and likely outperform over time!

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American Depositary Receipt Risk (ADR). ADRs involve risks like those associated with investments in foreign securities, including changes in political or economic conditions of other countries and changes in the exchange rates of foreign currencies. ADRs listed on U.S. exchanges are issued by banks or trust companies and entitle the holder to all dividends and capital gains paid out on the underlying foreign shares. Investing in ADRs as a substitute for an investment directly in the foreign company shares, exposes the Fund to the risk that the ADRs may not provide a return that corresponds precisely with that of the foreign company’s shares. Concentration Risk. Because the Fund’s investments will be concentrated in a group of industries, to the extent the Index is concentrated, the value of its shares may rise and fall more than the value of shares in a fund invested in a broader range of industries. ESG Orphan Risk. A strategy or emphasis on environmental, social and governance factors (“ESG”) orphaned industries, such as fossil fuel energy, nuclear power, tobacco, weapons/firearms, alcohol and/or gambling, may limit the investment opportunities available to a portfolio. Therefore, the portfolio may underperform or perform differently than other portfolios that do not have an ESG Orphaned industry focus or limitation. New Fund Risk. The Fund is recently organized with no operating history and managed by an Adviser that has not previously managed a registered fund. As such, the Fund has no track record on which to base investment decisions. Non-Diversification Risk. Because the Fund is “non-diversified,” it may invest a greater percentage of its assets in securities of a single issuer or fewer issuers than a diversified fund, which may expose the Fund to the risks associated with the developments affecting the issuers in which the Fund invests. Passive Management Risk. The Fund is passively managed and attempts to mirror the composition and performance of the ESG Orphans Index. The Fund’s returns may not match due to expenses incurred by the Fund or lack of precise correlation with the index.

The Constrained Capital ESG Orphans Index is a representation of companies that have business operations in one of the following industries: alcohol, fossil fuel energy, gaming, nuclear power, tobacco and weapons/firearms. The Index is calculated, administered, and published by Solactive AG, the Index’s administrator.

Constrained Capital, LLC is the owner of the ESG Orphans Index and the sponsor of the Fund.

Toroso Investments, LLC (Toroso) serves as investment adviser to the Fund.

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