If ESG is in the dumps, what will be the new hotness?

Plus: to AI or not to AI?

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This week, a couple of ETFs got a makeover: Columbia Threadneedle decided to drop the 'ESG' from two of its ETFs:

"The board of trustees of the Columbia U.S. ESG Equity Income ETF and the Columbia International ESG Equity Income ETF approved changes to each ETF’s name, investment objective and principal investment strategies effective on or about June 1."

The U.S. Equity Income fund is particularly relevant: on the one hand, its top holding already prior to the decision was Exxon Mobil. Yet somehow, it’s also on the list of funds that the state of Texas will be divesting from because they are ESG and therefore anti-oil. (Note: I used to write for CTI a long time ago.)

BlackRock has been having an even tougher week with the Texas divestments, after the Texas Permanent School Fund pulled out $8.5 billion. By the FT's tally, this brings BlackRock's outflows from Republican-led investment funds to $13.3 billion. And the ESG revolt isn't quite done; according to Pleiades Strategy, a policy research group, 38 laws targeting ESG principles have been passed in 17 states, as of the end of January.

So you can see why, this week of all weeks, the WSJ asked if the ESG moniker had run its course.

It's a very astute observation, that the name matters more than the thing itself. After all, it's not exactly that climate change concerns have vanished. It's that, as Larry Fink himself has said, the name has become 'weaponised'.

And given that this particular name — ESG — has been a powerful engine for inflows, it's only natural to ask: what's next? This week, we'll stick our neck out and wager two bets on hot naming trends:

1. Net-zero

We've had lots of net-zero this week! Morningstar has just launched a range of indices designed to identify companies focused on the transition to a low-carbon economy, and:

"Each is designed to help investors target companies across sectors that are leading their peers in moving towards net zero."

Aon, too, has a new offering: a responsible investment tool that offers institutional investors a deeper understanding of their portfolios:

"The solution also includes effective risk management as well as alignment with goals and ambitions such as net-zero."

And it's not just service providers. BNP Paribas unveiled a new fund, which it claims is the first equity strategy with net-zero alignment as its primary goal. The fund will narrow its investible universe to 1000 stocks via a 'net-zero screening'. The press release also made sure to mention that this all fits with BNP Paribas AM's 'wider net-zero efforts'.

Finally, on the client side too: back in January we mentioned two UK local-authority pension funds setting net-zero targets, in the context of a study on herding behaviour in pension funds. We said at the time:

"It's probably a good time to call other local-authority pension funds and remind them of your climate-related products."

Now I guess I'll add: Be sure to affix 'net-zero' to your products' names.

2. Tokenisation

We're back to BlackRock, who this week debuted a tokenised fund on the Ethereum blockchain. Partnering with Securitize, they offer the BlackRock USD Institutional Digital Liquidity Fund. Unlike its earlier foray into digital currencies — the Bitcoin ETF — this fund sets a minimum investment size of $100,000.

But BlackRock wasn't alone in tokenising stuff. Citi partnered with Wellington Management and WisdomTree to tokenize private funds. I quote directly:

“With ABN AMRO simulating the role of a traditional investor, the proof of concept tested the tokenization of a Wellington-issued private equity fund by bringing it onto a distributed ledger technology (DLT) network. The underlying fund distribution rules were encoded into the smart contract and embedded in the token transferred to hypothetical WisdomTree clients.”

I don't really know what any of this means. But judging by the levels of enthusiasm shown, maybe we should start getting used to this lingo.

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Treasure Corner:

Investment consultant Mercer published a report this week, AI integration in investment management. The report is the outcome of a survey, which collected responses from investment management, technology, and business development teams of asset management companies. Respondents included 150 managers from various asset classes.

Reading it, I was struck by several observations:

1. AI is anything that doesn’t yet work. I didn’t coin this phrase, but it’s a useful touchstone, and it is evident in this report. The survey asked which technologies are considered “AI”. 93% said generative AI is “AI”, and 85% said machine learning models were AI. Factor models, though, were definitely not AI: only 12% said linear factor models were AI…

2. Adoption is inverse to how AI the AI is…

   What was so striking about the above responses was that the more managers considered a technology was “AI”, the less they were actually using it. The order was literally flipped! 62% use quantitative screening, but only 9% consider it AI.
   And only 26% said they were currently using generative AI.

3. When asked how companies actually integrate AI to the investment process, you can see a lot of the integration is done via suppliers. The top use cases are for ‘Incorporating alternative data sets’, ‘Developing forward-looking indicators’, and ‘Analyzing market indicators’. This makes sense as few asset managers are internally staffed to carry out techy research.

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FinText provides training to asset-managers teams that want to use AI to improve their fund marketing efforts. See for yourself.

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Also Happening

• Speaking of AI, the Financial Times is testing an AI chatbot trained on decades of its own articles. The chatbot, 'Ask FT', answers subscriber questions with insights pulled from decades of articles. It's currently only available to a select group of FT Professional subscribers. Although there are occasional hiccups, the tool is generally factually correct, with the added benefit that it delves into the archives for answers. It's currently powered by Claude, the LLM developed by Anthropic, but the project head said this could change, as they designed it to be 'model agnostic'.

• This week, Kim Kardashian was fined £1.1m for promoting crypto on Instagram. She hadn't revealed she was paid to do it. The only interesting thing here is the timeline: the offending post appeared last summer, and the fine was issued this week. Because — also this week — the FCA announced it's cracking down on social media ads. Last year, over 10,000 misleading ads were removed. I guess within ten months or so we'll also start to see more news on fines?

• A New Bill Would Ban Chinese Stocks in Index Funds. A new bipartisan bill is aiming to restrict U.S. investments in China by targeting index funds. The proposed No China in Index Funds Act would forbid funds that track an index from holding any Chinese securities starting 180 days after the bill is passed. It's part of a four-bill package, in which another bill would subject income derived from securities in “countries of concern” to income tax, rather than to capital gains. Like with ESG, beware the moment individual states start weighing similar laws.