ESG and climate funds have risen from a niche topic to the hottest asset class in just a few years. The total value of these funds is already $1.7 trillion. However, anyone who wants to invest in an ecologically correct fund with a clear conscience must ask themselves whether they are really only investing their money in companies that do not invest in “dirty” industries with high CO2 emissions. For a layman, this is difficult to determine. With the strong growth, there is also growing concerned among regulators about the quality, consistency, and transparency of the products available.
That’s why UK think tank InfluenceMap took a close look at 723 equity funds promoted as ESG and climate funds. Their fund volume is already $330 billion. They checked to see if their choice of securities was guided by Paris climate targets, to which 195 countries have committed and set as a goal to reduce global warming to below two degrees Celsius. Special attention was paid in the climate compatibility check of the funds to the question of whether they have securities in their portfolios that run counter to this intention.
Read more about the study on ESG funds conducted by the British company InfluenceMap and find the latest business news with the Born2Invets mobile app.
Eight “dirty” sectors
The analysis was conducted using the Paris Agreement Capital Transition Assessment (PACTA) methodology. This was developed by the non-profit think tank 2-Degrees Investing Initiative to examine the climate impact of investment portfolios. InfluenceMap analysts used this data to determine whether and how many funds included shares of climate-relevant sectors – which account for 70 to 90 percent of CO2 emissions financed by capital markets. The “dirty” industries include oil and gas production, coal mining, transportation (automotive, aviation, shipping) and industry (steel, cement). They are particularly relevant to achieving climate targets. Corporations that emit more greenhouse gases on average than allowed under the Paris Agreement to meet climate targets.
The result of the study by the British think tank: of the 723 broad ESG funds examined, 421 or 71 percent are not in line with the climate targets and have shares of particularly climate-damaging companies from the eight sectors mentioned in custody. For example, they hold shares in oil companies such as Total, Halliburton, Chevron and Exxon Mobil.
Climate funds invest in a climate-damaging way
The eco-check for climate funds is not much better. Of 130 climate funds, 72 (55 percent) received a negative rating. The funds crystallized according to PACTA method as not compatible with the climate goals. For example, the funds studied that carry the climate funds marketing label invest $153 million of their portfolios in stocks of companies in the fossil fuel value chain. Such holdings may be of concern to investors, especially in the wake of the IEA’s Net Zero by 2050 report, which recommends an immediate halt to all new fossil fuel exploration.
However, according to study authors, the problem begins with climate-related stock indexes, which also feature shares of companies that are particularly harmful to the climate. Most of these funds follow a passive strategy, attempting to track market indexes while applying exclusion and/or weighting criteria. These strategies result in portfolios that are either only slightly different from the underlying benchmark or identical if some fossil fuel companies are excluded. The remaining holdings of these funds are then similarly misaligned with the tracked market index.
According to InfluenceMap, the results of the research show the lack of consistency and, in many cases, transparency in the direction of many ESG and climate funds and the selection criteria of stocks pushing global climate goals. Investors are well advised, in view of such apparently massive greenwashing, to take a close look at the fund factsheet before buying and at least check the stated stock position for particularly climate-damaging investments, as long as the marketing and transparency of climate and ESG funds are not subject to stricter requirements.
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