Fund Solutions

Passive Funds Linked to Greenwashing

Reclaim Finance calls for increased anti-greenwashing regulation for fund managers, and collaboration with index providers. 

Asset managers are greenwashing their passive funds, according to new findings by NGO Reclaim Finance 

The report analysed 430 passive funds labelled as “sustainable” by Amundi, BlackRock, DWS, Legal & General Investment Management (LGIM), and UBS Asset Management. It found that 70% of the assessed funds were exposed to companies developing new fossil fuel projects – such as ExxonMobil and Shell – meaning they all face greenwashing-related reputational and legal risks.  

“These funds are misleading individual investors as to their true so-called sustainable contents, but our research also highlights that asset managers are not tackling the decarbonisation of their passive portfolios effectively,” Lara Cuvelier, Sustainable Investments Campaigner at Reclaim Finance, told ESG Investor. 

In addition, the findings also contradict the International Energy Agency’s 2050 net zero pathway, according to which there is no room for new oil and gas fields if global temperature rise is to be limited to 1.5°C. 

“This is especially concerning [given the fact that] passive funds have demonstrated strong growth in recent years – so we know that many climate-focused assets are being managed passively,” said Cuvelier. 

According to research by data provider Morningstar, passive strategies represented almost a quarter of ESG fund assets globally in 2023. 

Noting that passive funds were “blind spot” in asset managers’ climate policies, Reclaim Finance said they were often left out of scope in cases of restrictions on investment in fossil fuel companies. Amundi and DWS, however, have been applying exclusions on coal to a portion of their passive funds. 

Previous research has highlighted shortcomings in passive managers’ stewardship efforts, with BlackRock, Vanguard and State Street reportedly opposing “more often than not” shareholder resolutions aimed at improving the environmental governance of large carbon-intensive companies. 

Setting new standards

Based on its findings, Reclaim Finance also questioned asset managers’ reliance on index providers, warning of increased exposure to greenwashing risks if they failed to conduct sufficient due diligence.  

Having analysed the indices used by 25 sustainable-labelled funds, the NGO found that the methodologies used for sustainability claims were not standardised or based on scientific criteria.  

“It is part of the role of asset managers to participate in actively setting the standards for what should and should not be in an index,” the report suggested.  

With many of the funds using only a select few providers, Reclaim Finance suggested that engagement efforts should focus on a limited number of firms to achieve significant impact. Eighteen out of the 25 indices analysed in the report were provided by MSCI. 

“Fund managers can improve on their due diligence to make sure that, when they launch passive funds, the indices they follow align with climate-focused standards and internal policies,” said Cuvelier. “They could also ask index providers to flag companies that are involved in fostering fossil fuel expansion.”  

In its 2023 coal policy, DWS noted that it was engaging with index providers to ensure the exclusion of coal developers and companies from their climate, ESG and – where possible –, mainstream benchmarks, while improving disclosure and expanding net zero index solutions.  

“The existence of suitable indices and agreement of a majority of investors to transition their exposure is a prerequisite to converting existing and offering new passive funds in line with this policy,” DWS said. 

In 2022, the UN-convened Net Zero Asset Owner Alliance urged index providers to accelerate the development of net zero-aligned benchmarks to support investors’ growing appetite to adopt passive strategies. 

Wielding the stick 

In parallel, Reclaim Finance urged regulators to strengthen rules against greenwashing, such as forbidding the sale of funds supporting fossil fuel expansion – especially if they are labelled as sustainable. 

“Regulators – such as those in Europe – have publicly stated that they want to address greenwashing [by companies] and introduce rules for labelling sustainable funds,” said Cuvelier. “But the asset management industry is not going to become more disciplined without sanctions and regulations that go further than guidelines or voluntary standards.” 

Unless this happens, she explained, the market will keep profiting from the ongoing lack of robustness and clear criteria, and will define transition and sustainability in its own terms.  

Bucking this trend, the European Supervisory Authorities (ESAs) published last year a common high-level understanding of greenwashing as part of their progress reports on assessing greenwashing in the financial sector. 

Other national regulators across the EU have also taken action. Last year, France declared that funds would only be able use its national Socially Responsible Investment (SRI) label if they blacklisted fossil fuel companies that continued to expand their production. 

Beyond mounting regulatory action, asset owners are also looking to use cleaner indices as they decarbonise passive funds – meaning both index providers and asset managers will likely come under increased scrutiny.  

“It’s important that asset owners now consider whether their managers are taking the right steps across both active and passive strategies, and are not involved in any greenwashing,” said Cuvelier.  

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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