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Author: Don Obrien

Climate funds often fall short of Paris goals, says report


ESG investing updates

Funds marketed as “climate themed” often hold shares in large polluters including big oil companies, and many are inconsistent with the goals of the Paris agreement despite claiming to be “aligned” with it, according to analysis by think-tank InfluenceMap.

About 72 of the 130 climate-focused funds examined — which collectively hold more than $67bn in assets and are managed by leading investment houses including BlackRock and State Street Global Advisors — were found to be misaligned with the Paris agreement goal of limiting global warming to well below 2C.

Collectively, the 130 funds held $153m in fossil fuel production chain companies, according to the report published on Friday. Both a State Street “fossil fuel reserves free” fund and a BlackRock “fossil fuel screened” fund held shares in Marathon Petroleum and Phillips 66. Funds that more closely track broad stock market benchmarks would typically hold greater shares of their portfolios in such companies.

“It’s very hard for investors to be able to accurately ascertain whether funds that are branded [as climate-focused] are actually Paris aligned or not,” said InfluenceMap analyst Daan Van Acker. He noted the wide spectrum of terms used to describe green funds and the “lack of transparency” about what such marketing meant.

Financial products labelled as responsible, sustainable and green have soared in popularity in recent years, and asset managers have come under pressure to align their portfolios with the transition to net zero emissions. 

But these products have often been criticised for having links to polluting companies or those accused of being socially or environmentally irresponsible.

Ben Caldecott, from the Smith School of Enterprise and the Environment at the University of Oxford, said retail investors would be surprised to see carbon-intensive companies in funds marketed as green.

But he added that a fund’s eco-credentials should be evaluated on more than the number of brown stocks in its portfolio. Asset owners could push polluters to become greener through engagement, which might have a greater impact on driving the transition to a lower carbon economy than simply investing in green stocks, he argued. Leaving such assets to investors disinterested in environmental goals is counter-productive, say assets managers in this sector.

Friday’s report measured how Paris-aligned a fund was by assessing the forward-looking production of portfolio companies, such as how many internal combustion engine vehicles a car company planned to make. The researchers then compared that information to sector-specific frameworks for limiting warming to below 2C, taking into account each company’s market share.

A negative score indicated a portfolio owned too much brown or too little green. 

Seven climate-focused funds offered by State Street were on average minus 14 per cent misaligned, InfluenceMap found. Eight UBS funds were minus 8 per cent misaligned and eight BlackRock products were minus 6 per cent misaligned.

State Street said that to meet “differing investor needs” it offered “a range of ESG strategies, including funds aligned to the Paris agreement, and funds that meet climate objectives in other ways”.

BlackRock said the research did not include several of its green funds, including some designed to be Paris-aligned. It added that it offered clients “a broad spectrum of sustainable strategies to support them in achieving their investing goals”.

InfluenceMap said it assessed only funds for which it could obtain full portfolio holdings data. 

UBS said the study did not capture “the positive impact of index based and tilting strategies” which resulted in funds with “a significantly lower carbon intensity and reduction of carbon risk but which deliver benchmark returns in line with the parent index”.

About a third of the 130 funds scored in the range between minus 10 per cent and minus 20 per cent, the report said. Such funds — typically those that passively track market indices but apply a screening, such as excluding fossil fuel companies — “appear to provide limited climate benefit from a portfolio standpoint compared with the broader market”, it said.

Even funds marketed as “fossil fuel restricted” often retained holdings in oil and gas value chain companies, such as refiners and distributors.

Some passive funds did not exclude polluting sectors but underweighted them relative to the index. Among the most common fossil-related holdings in the funds analysed were oil companies Total, Chevron and ExxonMobil, and oil service company Halliburton, the report said.

“When you’re talking about trillions of dollars [flowing into sustainable investing products] there’s no way that scale of money can be massively better on ESG performance than the broad market,” said Sonja Gibbs, head of sustainable finance at the Institute of International Finance.

The report’s assessment of another 593 broad ESG funds found that 71 per cent were misaligned with Paris, with scores as bad as minus 100 per cent. Several such funds had miners Rio Tinto and BHP in their top 10 holdings, while a Franklin Templeton “sustainable equity fund” held oil company Woodside Petroleum. 

Climate Capital

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