The last few years has seen huge growth in ESG and climate-themed financial products on global markets, with the funds offered growing to a total value of $1.7 trillion in 2020. In parallel, regulators have become increasingly concerned about the quality, consistency, and transparency of available products in this category. This research assesses 723 equity funds specifically marketed using ESG- and climate-related key words, with over US$330 billion in total net assets. It does so on the basis of two climate criteria (portfolio Paris Agreement alignment and fossil fuel intensity) likely to be of primary interest to investors in funds marketed in this manner.
The metrics used in this research are a product of the publicly available FinanceMap platform, which scores asset managers and their funds worldwide on the climate alignment of their portfolios, as well as their stewardship activities. The Portfolio Paris Alignment score is based on the PACTA tool which is in wide use throughout the financial sector. PACTA uses production plan data for over 3,000 real-economy companies in the fossil fuels, power, and automotive sectors to compare portfolios' exposure to these companies with accepted climate scenarios.
A key finding of the research is the wide spectrum of terms used to describe climate-themed strategies in listed equity funds and the resulting difficulty, even within financial databases, of comparison between them. Given the relative lack of standards and regulation currently governing the marketing of ESG and climate funds, this research has defined over 30 search terms to group funds into two main categories: 'broad ESG' and 'climate-themed'.
In the broad ESG category, this report identifies 593 equity funds with over $265 billion in total net assets. Of the funds assessed, 421 of them, or 71%, have a negative Portfolio Paris Alignment score, indicating the companies within their portfolios are misaligned from global climate targets.
In the climate-themed fund category, the research identifies 130 funds with over $67 billion in total net assets. The findings indicate a very large variation in the climate performance of different funds, with Portfolio Paris Alignment scores ranging from -42% to +90%. Even in this category, the majority of funds is misaligned, with 72 out of 130, approximately 55%, receiving negative Paris Alignment scores. Additionally, climate-themed funds continue to hold fossil fuel production value chain companies to the aggregate amount of $153 million. Some of the most occurring fossil fuel-related holdings in climate funds are TotalEnergies, Kinder Morgan, Enbridge, Neste, Halliburton, Chevron, and ExxonMobil. Such holdings may be of concern to investors, particularly in the wake of the IEA's Net Zero by 2050 report, which recommends an immediate halt to all new fossil fuel exploration.
A large portion of the climate-themed equity funds analyzed in this report exhibit climate misalignment levels similar to those of market indices. Funds which are misaligned thusly appear to provide limited climate benefit from a portfolio standpoint compared with the broader market. This phenomenon is largely a result of the prevalence of passive strategies which seek to track market indices while applying exclusion and/or weighting criteria. These strategies result in portfolios which are either only marginally different from the underlying benchmark, or identical with the exclusion of some fossil fuel companies. The remaining holdings of these funds are then similarly misaligned to the tracked market index.
While the above findings do not necessarily contradict the strategy and goals of the individual funds analyzed, they highlight a lack of consistency and often poor transparency on the alignment of many ESG and climate-themed funds with global climate targets. This issue is likely to be of great concern to the investors of such funds, who may expect their climate-themed portfolios to at least outperform the market when comparing them with industry-standard climate criteria.