Warning bells have been sounded that investors could be misled when choosing climate-related funds as a third of low-carbon portfolios have been found to hold oil and gas stocks.
Analysis by Common Wealth, published today (December 21), found “evidence of inconsistency” among funds explicitly marketed for their climate credentials.
The think tank probed more than 10,000 UK-registered funds and found that of the 33 marketed with a specific climate or low-carbon theme, 12 held oil and gas producing companies. Three were invested in Exxon Mobil — a leading lobbyist against climate legislation.
The report said: “Even for an actively managed fund, which might argue it aims to change the behaviour of carbon-intensive companies that it owns, Exxon Mobil seems an unlikely candidate for effective engagement.
“Further, given the oil major’s consistent under-performance relative to mainstream indices, justifying its inclusion based on high return is also questionable.”
Common Wealth also found technology and financials were among the most common sectors held by ‘climate’ funds.
The report said while this was not explicitly contrary to any of the funds’ labelling or marketing, the prevalence of such companies “begged the question” of how such portfolios helped the fight against climate change.
It said: “What do these ostensibly climate focused funds really contribute to combatting the climate crisis, reducing emissions or driving a rapid transition to low carbon economic activities?
“There is nothing in the specific labelling or remit of these funds that would require them to invest in the green economy, in financial instruments design to drive the transition of business models to lower carbon activities, or other similar investments.
“However, there are a number of problems that arise from the current makeup of low carbon funds, even if they technically meet the ‘lower carbon’ criteria, as defined by a relatively narrow measure such as carbon footprinting or exclusionary screens.”
Such problems included that the average individual investor, making an effort to select a climate-focused fund, could “reasonably expect” their assets to be used to invest in areas related to clean energy and decarbonisation.
But instead the funds are invested in financial stocks — such as banks — which may have an indirect role in the climate crisis through lending and investment activities, the report said.
Similarly, according to Common Wealth, many leading tech companies supported the perpetuation of the fossil fuel industry through tech service contracts.
The report also raised concerns that governments and financial regulatory bodies had “increasingly lionised” ESG and climate-focused investment products as helping transition to a zero-carbon economy.
However, Common Wealth said this could result in the government simply “driving more investment into big tech, finance and pharmaceutical giants”.
ESG investing has boomed in popularity in recent years as fears over climate change have led investors to consider the impact of their money and as a growing number of millennials have begun investing.
Recent data from Morningstar showed global assets in sustainable funds hit £930bn in the third quarter of 2020, a record high, after investors pumped £62bn into such funds in the three months to September.
But greenwashing — a phenomenon of growing concern in the financial sector, which sees firms market products and investments to appear more sustainable and ethical than they really are — has been a thorn in the side of the responsible investment movement.
imogen.tew@ft.com
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