Hundreds of ‘sustainable’ funds are misleading European investors

In recent years, it has become fashionable for fund managers to include funds that invest sustainably in their range. The increasing interest from investors is also causing more and more fund houses to include a reference to sustainability in the names of their products. This often concerns English terms such as ‘sustainable’, ‘ESG’ (acronym for Environment, Social and Governance), ‘green’, ‘climate’…

But what lies under the hood of those self-declared sustainable funds? De Tijd investigated it in recent months, together with the Dutch news collectives Investico and Follow the Money and eight other European media, including Le Monde, El País, Børsen and Handelsblatt.

We examined 1,277 investment funds offered in Europe that use sustainability terms in their names. Based on data from the research agency Morningstar, we examined which companies they invest in for all these funds. All together this amounts to almost 300,000 investments, of which 47,515 are unique (in the same company) investments.

The results show that 551 of those ‘sustainable’ funds, or more than four in ten (43%), invest in fossil fuel companies. These are companies that still generate more than 1 percent of their profit from coal mines and/or more than 50 percent of their profit from gas and/or oil. Together, the ‘sustainable’ funds pump 6.8 billion euros into 552 fossil companies, an investment that you as a sustainable investor may not immediately expect.

The European regulator ESMA also believes that fossil companies do not belong in sustainable funds. ‘There are funds with names that radiate sustainability, while this does not correspond at all to their portfolios. That is why we are taking action and want to protect investors,” it said.

If we zoom in on the funds offered in Belgium in our research, it appears that 54 of the 130 funds with sustainability in the name – accounting for 42 percent – invest in oil, gas and/or coal. The 54 funds invest money in 114 different fossil fuel companies.

Some of these have been on lists of the most polluting companies in the world for years. These include well-known names such as BP, Shell, ExxonMobil, ConocoPhillips, Chevron, BHP Billiton, Petrobras and TotalEnergies. But also lesser-known oil and gas companies, which even in the fossil sector score below average in terms of climate efforts, such as the Texan oil and gas company Diamondback Energy or the Australian Santos, which has often been criticized for its high emissions and has been discredited several times for environmental pollution .

During the course of this year, ESMA guidelines will come into effect that will prohibit funds with a reference to sustainability in the name from investing in certain companies. “Funds that call themselves sustainable and at the same time invest in fossil companies mislead investors,” the regulator says.

The exclusion criteria that ‘sustainable’ funds will have to take into account are based on those of the Paris-Aligned Benchmarks (PAB). These are indexes that are composed in such a way that they meet the Paris objectives. They stipulate that global warming must be limited to a maximum of one and a half degrees. These indexes exclude companies that generate more than 1 percent of their profits from coal, more than 10 percent from oil and/or more than 50 percent from gas. These rules are even stricter for oil companies than those we applied in our research.

Admittedly, several of the fossil companies in the funds do have long-term strategies to become emission-free by 2050, and some even earlier, such as the American NextEra Energy by 2045. But they are also often criticized that their efforts are too limited .

Moreover, these ‘transition companies’ also fall under ESMA’s exclusion rules as long as they continue to derive a significant part of their profits from fossil fuels. Fund managers who invest in transition companies and still want to radiate sustainability by including ‘ESG’, ‘climate’… in the fund name, will have to add the word ‘transition’. In that case, they will not be subject to the PAB exclusion rules. There is one exception to this: if they explicitly mention the word ‘sustainable’ in the name, they do fall under those rules and are not allowed to invest in transition companies, even if they add the word ‘transition’.

A look at the 54 ‘sustainable’ funds offered on the Belgian market with fossil companies in their portfolio shows that 5 invest more than 5 percent of their assets in fossil companies. BlackRock Sustainable Energy tops the ranking. The largest ten participations include two fossil companies: the German RWE and the American NextEra. ‘Our fund names, prospectuses and other fund information provide transparency about the methodology we apply. The fund will be fully aligned with its strategy and the European SFDR rules (SFDR stands for Sustainable Finance Disclosure Regulation, ed.) managed,” BlackRock said in response.

Two BNP Paribas funds with ‘sustainable’ in the name also appear to invest in fossil fuel companies. One of them, BNPP Sustainable Europe Value, invests in four European energy companies: TotalEnergies, Shell, Eni and Engie. Although such energy giants also invest in green and sustainable projects, they remain heavily committed to oil and gas production. ‘Carbon Bombs’, a previous international study in which De Tijd participated, showed last year that Eni, for example, still invests in oil and gas projects that can emit at least 1 billion tons (gigatons) of CO₂ during their entire lifespan.

BNP Paribas Asset Management points out that the fund today fully meets the strict criteria included in the Belgian and French sustainable labels and in the European SFDR sustainability rules. ‘In addition, the fund has significantly reduced its weight in certain sectors, such as fossil companies, over the past twelve months and the intention is to further reduce this due to the stricter criteria imposed by the Belgian label ‘Towards sustainability’ and its French counterpart.’ , says the asset manager.

Striking: the list also contains many passive funds. These are funds that track a sustainable index and therefore have a sustainable reference in their name. Various sustainable indexes also appear to invest in fossil companies. An example is the MSCI EMU ESG Leaders index. It invests in TotalEnergies, Repsol, Galp Energia and OMV, among others.

‘The MSCI ESG Leaders indices (of which the MSCI EMU ESG Leaders is one, ed.) exclude companies active in certain sectors. A screening takes place for non-conventional oil and gas extraction (such as shale gas, ed.), but no specific screening for conventional oil and gas activities. The index also aims to include at least 50 percent of each sector by selecting stocks that are in line with the methodology.

Previous research by the French agency Reclaim Finance also revealed that 70 percent of 430 sustainable passive funds examined invest in companies that support new fossil projects. ‘Fund houses are falling back on ‘sustainable’ indexes, but those indexes do not exclude fossil companies. An analysis of the methodology of 25 commonly used indices shows that they have significant flaws and are not based on scientific criteria on greenhouse gas emissions. While active fund houses do have rules to limit fossil investments in their active funds, few managers apply them for their passive funds. They therefore make misleading sustainability claims,” ​​the research report said last month.

This is also evident when we look at the list of 551 European sustainable funds with fossil companies. The ranking is led by two listed index funds, which track the ‘sustainable’ indexes S&P World Energy ESG and MSCI World Energy Sector ESG respectively. Both ETFs contain more than 70 percent fossil companies.

The fact is that all these funds, both active and passive, will not escape the new rules of ESMA. The 551 European funds from our list will have to choose in the coming months: either divest their fossil investments or change their name.

An inquiry with the administrators shows that most have not yet decided. ‘The ESMA guideline is still in a preparation phase. Without knowing all the details, it is impossible for us to answer the question. Once we have more information, we will investigate the potential impact on our funds and consider what actions may need to be taken,” said AXA, which appears in the AXA WF Sustainable Equity QI list.

BNP Paribas Asset Management is also awaiting the final guidelines. “Once they are published, we will study the full impact and take action.” The Belgian manager Funds For Good, which appears on the list with European Equities Sustainable, has already decided to change its name. ‘Because the fund does not meet a minimum share of investments in sustainable assets and because it does not apply the exclusions of the Paris-Aligned Benchmarks, the name of the fund will be changed by the end of this year.’

In the meantime, the clock is ticking. ‘If the rules are approved by our board of supervisors they will be published on our website. Three months later, the rules come into effect for new funds. A further six months later for existing funds,” the ESMA said.

The publication of the rules by ESMA is expected this quarter. The application of the rules will then be checked by the supervisor of the country in which the funds are issued. For Belgian funds this is the FSMA. The Belgian regulator says today that it already checks fund names, including when launching new funds. ‘But the entry into force of the guidelines will indeed lead to additional screening.’