Greenwashing threatens efforts to advance sustainability goals, according to researchers from Reclaim Finance, a climate nonprofit
In Brief
- An analysis of 430 sustainable passive funds by Paris-based climate nonprofit Reclaim Finance found that 70% were helping expand the fossil fuel industry
- “Misleading sustainability claims should be a wake-up call for institutional investors who are in danger of being implicated in organized greenwashing, and for regulators who must play their part in protecting investors from misleading information,” according to the report
- The report is based on data from Morningstar, covered $2.7 trillion in assets and looked at funds sold by BlackRock, Amundi, UBS AM, Deutsche Bank subsidiary DWS and Legal & General Investment Management
Insight
The report, ‘Unmasking Greenwashing: A call to clean up passive funds’, by Reclaim Finance on analysis of 25 prominent sustainable funds revealed that a majority were investing in fossil fuel developers like ExxonMobil and Shell. This investment trend was particularly prominent in bonds, providing direct financing to fossil fuel companies. Among the asset managers surveyed, Amundi and BlackRock had significant exposure to fossil fuel expansion in their sustainable passive funds.
For instance, BlackRock’s iShares MSCI USA ESG Enhanced UCITS ETF, touted for integrating ESG criteria, still included investments in fossil fuel companies such as Schlumberger and NextEra Energy. Despite these investments, the methodologies used by these funds lacked a standardized approach to measuring ESG compliance, failing to address the presence of fossil fuel companies in their indices.
The absence of a uniform methodology for ESG compliance has long been a concern, as it can lead to discrepancies in ratings and evaluations. This challenge underscores the need for investors to conduct thorough research and scrutiny when considering ESG investments. According to Alexandra Mihailescu Cichon from RepRisk, relying solely on voluntary self-disclosures for ESG credentials may be inadequate, urging investors to assess risks and business conduct independently.
However, some argue that excluding fossil fuel companies from funds labeled as “sustainable” is based on flawed assumptions. Boston-based law firm Ropes & Gray contends that ESG-denominated passive funds track specific indices with disclosed methodologies, which may or may not involve strict screening of fossil fuel companies. This perspective challenges the notion that all investments labeled as “ESG” should exclude fossil fuel developers, highlighting the complexity and nuances of sustainable investing.
