Swedish Equity Funds are Too Hot

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    Stockholm (NordSIP) – With the implementation of SFDR in March 2021, and as markets mature, sustainable funds have come under increasing scrutiny, as investors seek sort the wheat from chaff and find the right right sustainable investment vehicles. Following an initial adjustment and advisory process, regulatory authorities started to apply pressure on fund managers to ensure accurate reporting. As we reported before, Swedish and Danish financial services authorities (FSAs) as well as ClarityAI have warned fund managers about their sustainability claims. In the start of the year we witnessed a flurry of SFDR fund downgrades from Article 9 to article 8.

    Now, more evidence has surfaced that fund managers, at least in Sweden, are not doing enough. According to a recent staff memo from Riksbanken, the Swedish central bank, published by advisor Cristina Cella, mutual funds in the country are, on average, aligned with a temperature increase of 2.77°C, well above the upper limit of 2°C set out in the Paris Agreement.

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    Cella’s Memo

    The data used in this analysis comes from the Carbon4Finance Carbon Impact Analytics (CIA) Platform, which measures the GHG emissions footprint of financial portfolios and  allows the identification of the temperature trajectory of an investment portfolio. Based on this information and on data about fund holdings collected from the VINN database of the Swedish Statistics Office, Cella’s memo examined the temperature alignments of 122 Swedish equity funds.

    “Figure 1 clearly shows that for the large majority of the funds in this study, the CIA methodology predicts a temperature alignment by the end of this century above the 2°C maximum target set by the Paris Agreement. The graph also shows that dispersion is large: five funds are aligned with a temperature rise below or equal to 2°C, eighty-five funds are currently aligned with a temperature between 2.1°C and 3°C, and thirty-two funds are aligned with an increase of between 3°C and 4°C,” the report argues.

    Cella also notes that, on average, joining climate initiatives or funds’ Morningstar low carbon designations made little difference to their temperature increase alignment. Moreover, her analysis also showed substantial exposure to securities issued by firms that still have significant work to do to green their operations.

    Moving in the Right Direction?

    This report follows another by the same author in 2022 which reached a similar conclusion. “Mutual funds are currently exposed to substantial transition risks and, unless they are very confident that firms in their portfolios will make a swift transition, they need to work substantially more to manage this risk,” Cella says.

    However, all is not doom and gloom. “I document that the average amount of shares owned by funds (after rebalancing) in firms with high emissions and large exposure to transition risks (both unfortunately only available in September 2022) has slightly decreased over the period 2019-2022. Unfortunately, because of data limitations, I cannot distinguish whether this is driven by firms reducing their emissions, and therefore their exposure to transition risks, or, absent this improvement, to funds actively trading away from these firms,” Cella argues.

    The issue is not abstract. Cella concludes with a warning that “monitoring is necessary to make sure that transition risks are managed correctly so as not to have consequences for financial stability.”

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