Stockholm (NordSIP) – Investors in passive funds marketed as sustainable should be wary of inadvertently holding positions in fossil fuel companies that are actively expanding their output, according to a new report published on 20 March 2024 by Paris-based non-governmental organisation (NGO) Reclaim Finance. Unmasking Greenwashing: A call to clean up passive funds lays out the results of the NGO’s analysis of the underlying holdings of 430 funds marketed in Europe by Amundi, BlackRock, DWS, Legal & General Investment Management (LGIM), and UBS AM.
Further research released on the same day by Carbon Tracker highlighted the oil and gas sector’s extremely poor record on the transition to low-carbon technologies, with many companies planning to increase production in the run-up to 2030. It is the presence of the worst of these expansionist firms that Reclaim Finance believes is wholly incompatible with the sustainability claims of many passive funds. Holdings data sourced from Morningstar revealed the presence of fossil fuel developers in 70% of the 430 funds under analysis. These included oil and gas developers like ExxonMobil, TotalEnergies, and Shell as well coal developers such as Adani, Mitsubishi, and Glencore. In total, Reclaim Finance identified 416 companies listed on the Global Coal Exit List (GCEL) or Global Oil and Gas Exit List (GOGEL), two publicly available databases of expansionist fossil fuel companies maintained by Berlin-based non-profit Urgewald.
Regulatory failures and ESG blind spots
Many of the funds under analysis hold companies involved in fossil fuel expansion while stating compliance with Article 8 of the Sustainable Finance Disclosure Regulation (SFDR). Reclaim Finance blames the lack of effective fund classification in the EU market: “In Europe, the failure of the SFDR to provide robust categorisation revealed the need for minimal criteria on sustainability, pushing national regulators such as the French AMF to call for strong fossil fuel exclusions.” While voluntary labels in France and Belgium currently exclude fossil fuel developers, the report seeks to highlight the failure of current EU-level regulations to clamp down on what it describes as greenwashing by passive fund providers.
Reclaim Finance believes that passive funds represent a blind spot in many large asset managers’ offering, with firm-wide sustainability policies often only applied to active strategies. Moreover, it claims that the problem also stems from a reliance on external environmental, social, and governance (ESG) screened indexes that fail to screen out companies involved in fossil fuel expansion. The report also highlights investments in fossil fuel sector bonds by passive fixed income or multi-asset funds, which have a direct impact on the capital available for these projects. The NGO is calling on asset owners, managers, and regulators to tackle the misleading sustainability claims of these passive fund products.
Lara Cuvelier, the main author of the report said: “Asset managers are fuelling the climate crisis with their so called ‘sustainable’ passive funds. While they are marketed as sustainable, these passive funds are invested in companies that are expanding fossil fuel production. Even asset managers which claim to have climate policies are part of the problem as most don’t apply their policies to passive funds.”
Passive boom compounding the problem
The potential negative impact of greenwashing in passive funds is compounded by the rapidly growing popularity of such products worldwide. Research quoted with the report shows a more $3 trillion shift from active to passive equity funds globally from 2006 to 2018. More than two thirds of fund inflows in Europe during the third quarter of 2023 were in passive funds, with a high proportion of these labelled as sustainable. US manager BlackRock, of the asset management firms under analysis in the Reclaim Finance report, has grown its ESG-related assets under management by 53% over the 2022-2023 period according to Morningstar direct data. This unexpected growth has taken place despite the politically driven backlash in BlackRock’s home market and poor relative returns for ESG strategies over the same period. The growth in BlackRock’s ESG products was led by its European business, while specialist transition themed strategies were popular in the US. Against this backdrop of rapid overall growth of passive investing and its popularity with sustainability focused investors, Reclaim Finance calls for much greater transparency from fund providers and better investor awareness of the underlying holdings that may be incompatible with their sustainability policies.
