On Tuesday, Cathie Wood’s ARK Investment Management filed a preliminary prospectus with the U.S. Securities and Exchange Commission to create an ARK Transparency ETF. The fund’s goal is to match the performance of the Transparency Index, before subtracting fees and taxes.

The ARK Transparency ETF expects to invest at least 80% of its assets in securities of the approximately 100 companies included in the Transparency Index, developed by Transparency Invest and maintained by Solactive. The index includes companies like Amazon, Apple, Microsoft, Netflix and Tesla, and it is based on a company’s score on six key performance indicators: written transparency standards; easy to understand terms; accountability as shown by the absence of cybersecurity and shareholder lawsuits; clear statements of price, cost and product availability; truth; and trust based on a proprietary metric.

The Transparency Index excludes companies operating in the following industries: alcohol, banking, chemicals, confectionary, fossil fuel transportation, gambling, metals, minerals, natural gas, oil and tobacco.

Because the Index excludes investments in fossil fuel-related industries, it and the Ark Transparency ETF have been compared to an environmental, social and governance (ESG) ETF. While that characterization is partly true, the focus on transparency (the “G”) plays a dominant role in selecting stocks.

When most of us hear about ESG investing, we emphasize the “E,” thinking of sustainability. Tariq Fancy, the former chief investment officer for sustainable investing at BlackRock, put it this way in a long article posted on Medium: “sustainable investing is becoming a deadly distraction.”

Last summer, Fancy and his team conducted a poll of some 3,000 American and Canadian citizens. Respondents reviewed eight recent headlines related to sustainability initiatives and were asked whether they thought each of the headlines was “helpful in driving social change.” Fancy comments:

All eight headlines were generally believed to be helpful. This is even though a number of them were decoys that I asked the polling firm to include in the study, knowing full well that they were window dressing with little to no real-world impact. …

I suspected that every time people read the latest such headline about guarding against climate change-related risks in the financial system, they mistakenly believed that these efforts were helpful in the fight against climate change itself. In fact, the survey found that not only was that true, but that most people think that this kind of work is just as helpful as any other pledge, such as large-scale organizational commitments to become net zero carbon emitters. Unfortunately, protecting an investment portfolio from the disastrous effects of climate change is not the same thing as preventing those disastrous effects from occurring in the first place.

Combatting climate change could cost $50 trillion over the next three decades. If ESG investing could in some way raise the cost of capital for nonsustainable operations, then these funds would be doing good work. But ESG funds, no matter how large, are unlikely to have much impact on that because their only leverage is divesting or not purchasing stocks that have not pledged allegiance to sustainability.

Focusing on corporate governance transparency addresses an issue that ETFs and individual investors can have some effect on. ARK’s Transparency ETF adds more pressure on companies to walk their sustainability talk. It’s a limited goal, but not an insignificant one.

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