The presence of companies with coal mining activity in climate-themed funds suggests the need for greater oversight of the environmental, social and corporate governance (ESG) fund sector, a climate change-focused non-profit organisation has argued. London-based InfluenceMap identified and analysed 118 climate-themed funds marketed to retail investors, examining the presence of what it referred to as “fossil fuel reserves” owned by companies held in the funds. The think tank said that, although fossil fuel companies were not necessarily barred from climate-themed funds for legal or other reasons, “it is reasonable to assume that purchasers of such funds would expect exposure to fossil fuel reserves within the funds to be minimised in line with the manner in which the funds are named and described in the fund marketing materials”. Policymakers in the EU were anticipating that such funds would both meet buyers’ expectations as well as “drive genuine impacts in the real economy”, it added. According to InfluenceMap, many asset managers selling climate funds “appear to have actively eliminated companies controlling fossil fuel reserves from their funds”. However, it also found 22 climate-themed funds exposed to fossil fuels. In addition, InfluenceMap said, the aggregate thermal coal intensity for the 118 funds was roughly equivalent to that of the iShares MSCI World exchange-traded fund. The think tank said its research pointed to the need for greater oversight of the climate-themed and broader ESG investment sector in relation to how funds and their impacts were marketed and described. “Efforts under way within the EU, including its taxonomy framework and application of the EU Ecolabel to financial products, aim to do just this,” said InfluenceMap. It also proposed the development of “a pathway for discerning and regulating the impact of these funds on the real economy and on actual emissions reductions, particularly as several pieces of research cited in this report indicate real world impact is a key motivator for investors in climate and ESG funds”. The organisation noted that many climate-themed funds remained invested in fossil fuel companies and pursued engagement with them in a bid to drive positive change in the world. Two of the funds covered by InfluenceMap’s analysis are State Street funds with “fossil fuel reserves free” in their name: SPDR MSCI EAFE Fossil Fuel Reserves Free ETF and SPDR MSCI Emerging Markets Fossil Fuel Reserves Free ETF. The think tank said they “contained fossil fuel reserves” through holdings in companies including energy corporate RWE and mining company Vale. According to Matthew Bartolini, head of SPDR America Research at State Street Global Advisors (SSGA), InfluenceMap’s report “misses some of the most important nuances in the nomenclature relating to addressing carbon in portfolios”. “As we continually perform range management and ensure that our solutions are fit for purpose, we continuously provide feedback to our partners on clients’ needs,” Bartolini said. “As a result, based on their own consultations, MSCI, the index provider, will implement changes to the MSCI ex Fossil Fuels indices as part of a November 2019 semi-annual index review that addresses some of the more stock-specific nuances of companies residing in a low-carbon industry.” Pure metallurgical coal companies would still not be excluded, however, Bartolini said, as this “reflects the current nomenclature and reinforces the nuances associated with ESG”. In its report, InfluenceMap said that the use of indices to construct climate-themed funds was likely to be “a significant driver of the presence of companies controlling fossil fuel reserves”. “It should be noted,” it added, “that most of the climate-themed funds connected to S&P and MSCI indices identified as containing fossil fuels are ‘optimised’ with respect to the method by which they track their affiliated index. “Given that the degree of input implied by ‘optimisation’ is variable, it is uncertain whether the inclusion of fossil fuel holdings in the index funds originates with the fund manager or the index provider.” Nathalie Wallace, global head of ESG investment strategy at SSGA, told IPE that in the financial world, fossil fuel reserves was understood as a reference to the oil and gas sector. “Thermal coal is embedded in our data providers under brown revenues, which includes all extractive industries that have a high pollution or high carbon emission output.” She added: “What we see is that everybody is looking at climate and asking what the funds are doing. If we only target one fund then you come to the conclusion that it’s not delivering on the promise to save the planet, but what we do is address different climate challenges with different products that respond to demand from clients.” Thomas O’Neill, co-founder and research director at InfluenceMap, said: “Coal is the single biggest contributor to climate change and investors and the public alike would reasonably expect that a fossil-free fund does not contain coal. “Our data shows that certain asset managers will need to greatly improve their climate offerings or risk losing the trust of increasingly engaged investors.” Earlier this week the European Commission approved an asset swap between RWE and E.ON that RWE said would make it “one of the world’s leading renewable energy companies”. It said it would focus primarily on electricity production based on renewables. The utility also mines coal in Germany.
The large number of climate-themed funds that unwittingly hold stakes in fossil fuel companies has highlighted the inadequacy of the industry's environmental, social and corporate governance (ESG) oversight. A recent report by Oxfam found that more than half a billion dollars from around the world have been invested into fossil-fuelled companies, with many of these investments coming directly or indirectly through pension funds.