More than half of climate-themed funds in the market are misaligned with the goals of the Paris Agreement, with State Street Corporation, UBS Group and BlackRock having the highest negative scores, new research has shown.
Climate change think-tank InfluenceMap analysed 723 funds with assets under management of more than $330bn (£240bn), which were split into two categories: 593 were considered broad environmental, social and governance funds while the remaining 130 were classified as climate-themed, due to key words in their title such as ‘low carbon’, ‘fossil fuel free’, ‘green energy’.
The second set of funds, with assets worth more than £67bn, had Paris Alignment scores ranging from minus 42 per cent to 90 per cent, with 72 receiving a negative score.
The research results were based on the Paris Agreement Capital Transition Assessment tool, which measures financial portfolios’ alignment with various climate scenarios consistent with international treaty.
InfluenceMap stated that having a negative score in the survey indicates a fund’s portfolio is “overweight in companies whose production plans negatively diverge from climate scenarios in the coal mining, oil and gas, power, and automotive sectors”.
The research showed that the 130 climate-themed funds collectively hold $153m in fossil fuel value chain companies, including TotalEnergies, Kinder Morgan, Enbridge, Neste, Halliburton, Chevron, and ExxonMobil.
The think-tank stated that a large portion of the climate-themed equity funds analysed in the report exhibited climate-misalignment levels similar to those of market indices, appearing to “provide limited climate benefit from a portfolio standpoint compared with the broader market”.
Despite considering that the findings do not necessarily contradict the strategy and goals of the individual funds analysed, InfluenceMap says the results “highlight a lack of consistency and often poor transparency on the alignment of many ESG and climate-themed funds with global climate targets”.
State Street, UBS and BlackRock the worst performers
Among the five asset managers with the largest offering on climate funds, State Street Corporation, UBS and BlackRock were the worst performers, with a score of minus 14, 8 and 6 per cent, respectively.
On the flipside, with nine funds with assets worth £4.7bn, BNP Paribas had an average portfolio Paris Alignment score of 8 per cent, while Invesco, with four funds worth $2.4bn, had a result of 23 per cent.
In response to the research results, a spokesperson at State Street Global Advisors said: “To meet differing investor needs and risk profiles, we offer a range of ESG strategies, including funds aligned to the Paris Agreement, and funds that meet climate objectives in other ways.”
An UBS spokesperson said: “The study’s focus on exposures to a limited number of sectors does not adequately capture the positive impact of index-based and tilting strategies.
“These funds maintain sector weightings in line with the parent index but reweight companies within sectors based on their climate performance.
“This approach results in funds with a significantly lower carbon intensity and reduction of carbon risk but which deliver benchmark returns in line with the parent index.”
According to the analysis, BlackRock is the largest provider of climate-themed funds in terms of net assets (£26bn).
“Its funds are misaligned on average but, as with the sector as a whole, vary depending on the investment strategy of the individual fund,” the research stated.
A BlackRock spokesperson argued that the research “has gaps in its assessment of BlackRock’s sustainable fund range”.
“For example, with new climate benchmark regulations and data, BlackRock has partnered with index providers to bring Paris-Aligned indices to market. BlackRock’s Paris-Aligned Climate exchange-traded funds are not included in the InfluenceMap study.”
The spokesperson said: “BlackRock offers its clients a broad spectrum of sustainable strategies to support them in achieving their investing goals, from reducing exposure to fossil fuels or minimising carbon emissions to alignment with climate goals.
“Investors have full transparency into the holdings of our ETFs, which are updated daily, and we have disclosed the MSCI sustainability characteristics of our ETFs online for over two years.”
Climate-themed funds perform better than ESG ones
Despite some negative results, the climate-themed funds performed better than their ESG counterparts, since the former had an average Paris Agreement alignment score of 0 per cent while the latter scored minus 6 per cent.
Corporate bond managers urged to explain climate transition risks
As defined benefit schemes are increasingly expected to replace their equity portfolios with corporate bond holdings in their journey to reach funding targets, pension funds and their asset managers are being urged to carefully assess companies’ attitudes to climate transition risks.
Daan Van Acker, analyst at InfluenceMap, noted that “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”.
He said: “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.”
Van Acker argued that the “lack of consistency and clarity makes it difficult for investors to determine what these funds’ descriptors means in practice,” and that the analysis “is a further piece of evidence in favour of stronger regulation surrounding the marketing and transparency requirements of ESG and climate-themed funds”.
