New analysis says majority of climate-themed investment funds are not living up to claims, calls for increased regulatory oversight.
More regulation is needed around the marketing and transparency of climate-themed investment funds after new research found that most are misaligned with the goals of the Paris Agreement.
The report from InfluenceMap – ‘Climate Funds: Are they Paris Aligned?’ – analysed 723 listed-equity funds with total assets under management of over US$330 billion, dividing funds which used one of 30 descriptions into two categories: broad ESG and climate-themed.
In the broad ESG category, InfluenceMap identified 593 equity funds with over US$265 billion in total net assets of which 71%, had a negative Portfolio Paris Alignment score.
Of the 130 climate-themed funds, with titles such as ‘low carbon’, ‘fossil fuel free’ and ‘green energy’, and over US$67 billion in total net assets, 55% had a negative Paris Agreement alignment score. The lowest score was -42% with the best scoring fund hitting +90%.
The Paris Agreement alignment score is based on the widely used open source PACTA tool, developed by the 2º Investing Initiative. A negative score indicates a fund’s portfolio is overweight in companies whose production plan data negatively diverge from climate scenarios in the coal mining, oil and gas, power and automotive sectors.
The report found that State Street’s climate-themed funds had an average Paris Alignment score of 14%, with UBS at -8% and BlackRock at -6%. Invesco’s funds scored a positive 23% with BNP Paribas on 8%.
InfluenceMap said the findings suggested a need for closer oversight of the sector. It said the variation in both general alignment and fossil fuel intensity across fund types resulted in a fund landscape which is “highly inconsistent and difficult to interpret”.
“As the number of ESG and climate-themed funds has exploded in recent years, so too have concerns among investors and regulators about greenwashing and transparency,” says InfluenceMap analyst Daan Van Acker.
“This report reveals the extent to which some climate-themed funds are misaligned with the goals of the Paris Agreement. It also exposes the considerable variation in climate performance between these different funds which is not necessarily explained by their individual branding. The lack of consistency and clarity makes it difficult for investors to determine what these funds descriptors means in practice. This analysis is a further piece of evidence in favour of stronger regulation surrounding the marketing and transparency requirements of ESG and climate-themed funds.”
Close to the index
The report also found that a large portion of the climate-themed equity funds exhibited climate misalignment levels similar to those of market indices.
Funds being marketed as ‘fossil fuel restricted’ showed little variation with broader market indices, the report said, and commonly retained holdings in oil and gas value chain companies.
Indeed, the 130 climate-themed funds collectively hold US$153 million in fossil fuel value chain companies including TotalEnergies, Kinder Morgan, Enbridge, Neste, Halliburton, Chevron and ExxonMobil.
State Street’s SPDR S&P 500 Fossil Fuel Reserves Free ETF and BlackRock’s iShares Developed World Fossil Fuel Screened Index Fund hold shares in large US refiners Marathon Petroleum Corporation and Phillips 66.
Recent research suggests that early regulatory attempts to distinguish between funds according to their sustainability credentials have yet to bear fruit.
A Morningstar survey found that more than a quarter (27%) of Sustainable Finance Disclosure Regulation (SFDR) Article 9 funds had a more than 1% exposure to firms deriving more than 5% of revenues from thermal coal, compared with 19% of Article 8 funds and 22% of non-classified funds.
The InfluenceMap research also revealed that of the sub-categories of climate-themed funds, the majority of ‘clean-energy’ funds, highly invested in renewables-heavy power sector companies and little else, received positive Paris Alignment scores. This included two of BlackRock’s iShares Global Clean Energy funds with over US$12 billion in total assets between them.
InfluenceMap is a UK-based NGO focused on researching the climate-related lobbying activities of corporates. Its FinanceMap data tool measures the climate performance of financial institutions across portfolios and stewardship activities.