Joachim Kattrup 
* BLACKROCK INC (XNYS:BLK * State Street Global Advisors * Vanguard *
Exchange-traded funds, or ETFs, have swept through the financial world, building to a collective worth of $6.7 trillion by the second half of 2020. An ETF is a sort of hybrid between a single-company stock that’s easy to trade, and a low-cost, diversified mutual fund that spreads an investor’s risk among a selection of different companies.
But this Goldilocks solution, feverishly attractive to individual and institutional investors alike, entails feasting on a measure of tainted porridge, according to a recent report by the London-based nonprofit financial think tank Planet Tracker. Investing in these funds translates to support for deforestation and other environmental damage coming from a broad swath of society, the authors write.
The analysis found that 70% of the ETF market is in the grasp of three U.S. financial firms. And just four companies hold the reins to 60% of the related market for index funds, which track major market indicators such as the S&P 500 in New York or the FTSE in London. Many ETFs are pegged these indexes.
That level of influence means that these companies have an outsize opportunity to end financial support for companies that clear forest — if they choose to do so, said John Willis, the report’s lead author.
Index funds, and especially ETFs, have surged in popularity in recent decades. Total investment in these products in 2020 was more than five times what it was in 2010.
“They’re still growing at a phenomenal rate,” Willis said in an interview.
To get an idea of the scale of ETF support for deforestation, Willis and his colleagues looked at 26 publicly traded companies that produce or process soybeans and also have ties to deforestation, using the graded list of companies compiled by the search platform Deforestation-Free Funds. Soy production ranks just behind cattle ranching as the largest force behind deforestation in the tropics, touching off the loss of half a million hectares (1.2 million acres) of forest each year. The Planet Tracker analysis uncovered investments worth $9.3 billion from ETFs in these companies as of mid-2020.
The Planet Tracker report found that BlackRock, State Street Global Advisors and Vanguard control more than two-thirds of all ETFs. On the index fund side, Bloomberg, FTSE Russell, MSCI and S&P Dow Jones are the major players; all are U.S.-based companies, except for U.K.-based FTSE Russell.
Because these markets are highly concentrated in the hands of just a few firms, they “together have disproportionate power to mitigate deforestation risk (as well as other natural capital risks) in the ETF market,” the authors of the Planet Tracker report write.
The Planet Tracker report found that BlackRock, State Street Global Advisors and Vanguard control more than two-thirds of all ETFs. On the index fund side, Bloomberg, FTSE Russell, MSCI and S&P Dow Jones are the major players; all are U.S.-based companies, except for U.K.-based FTSE Russell.
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