One third of climate-themed funds being sold in the UK were invested in oil and gas producing companies at their most recent filing date, according to research from think tank Common Wealth, highlighting concerns that investors could be misled over the true nature of sustainable investment products.
The research analysed a cohort of over 10,000 mutual funds and exchange-traded funds registered for sale in the UK and found that of the 33 funds being marketed to a specific climate or low-carbon theme, 12 were invested in oil and gas companies.
The report found the most common holdings of climate funds being sold were technology companies, as well as financial services companies and real estate investment trusts, each constituting 15% of the funds’ holdings. Meanwhile energy, which includes renewables, accounted for only 3% of the aggregate value of the funds analysed. Three of the funds – two of which were actively managed – held shares in ExxonMobil.
Many of the top sectors found in climate-focused funds, though they may be “low carbon” in the narrow sense of direct emissions, such as a bank, may have an outsize indirect role in the climate crisis through lending, underwriting and investment activities, argued the report’s author, Adrienne Buller, a senior research fellow at Common Wealth.
“Similarly, many leading tech companies support the perpetuation of the fossil fuel industry through tech service contracts,” she added.
While these findings did not necessarily suggest any misconduct or false advertising on the part of the providers, the report said, they did indicate the need for greater transparency and regulation.
Identifying “greenwashing” has been made harder by a lack of scrutiny of the scores and analysis on which ESG indices and products are based, the report said.
“Owing to the continued absence of a stringent regulatory framework for ratings, criteria and conclusions may vary widely between sources; moreover, methodologies are often questionable,” argued Buller.
ESG ratings may also be limited by relying on publicly disclosed accounts from the companies being rated, which may not contain all key information, the report said.
“Reflecting this incomplete information, ESG ratings often reflect companies’ processes and protocols pertaining to ESG issues, rather than actual impacts or outcomes,” Buller argued.