Corporate Knights: ETFs making misleading fossil-free claims

    The growth of the responsible investment industry is an increasingly promising trend even amidst the surging concern over climate change, reports Corporate Knights.

    In 2018, the Global Sustainable Investment Alliance (GSIA) identified that nearly $31 trillion is managed under responsible investment strategies globally. Canada is not immune from this trend: the Canadian Responsible Investment Trends Report found that as of 2018, more than $2 trillion in Canadian assets were managed according to one or more responsible investment strategies.

    Much of this growth has been centred on ESG funds. According to Morningstar data, their value now surpasses $1 trillion USD globally. However, this phenomenal growth is beginning to reveal fault lines that have the potential to undermine the legitimacy of the ESG fund sector, especially if there is no improvement made to oversight or regulation.

    For the ESG fund market to retain the confidence of investors, ESG funds must not only deliver returns, but must also generate the impacts in the real economy which they claim (i.e., lowering carbon). This is particularly important for climate-themed funds, which have been identified as a key instrument in driving climate finance and shifting investment from brown to green assets.

    However, in the absence of any meaningful regulation to define green investment, prospective investors in climate-themed funds face a dizzying array of terminology — carbon constrained, carbon momentum, carbon neutral, climate aware, climate strategy, fossil fuel reserves free to name a few — with little indication of how these terms relate to the contents of the fund itself.

    In light of this, InfluenceMap, a U.K. based think tank, analysed 118 ETFs marketed under a climate theme with an aggregate AUM of US$18 billion, four of which are sold to retail investors in Canada.

    Surprisingly, the 118 funds analyzed had an aggregate exposure to thermal coal reserves roughly equivalent to that of the iShares MSCI World ETF. In other words, these funds, despite their climate positive marketing, ended up with an exposure to thermal coal reserves comparable to that of a mainstream global large cap benchmark.

    In total, 22 funds were found to have exposure to thermal coal or oil and natural gas reserves. At the extreme end, two funds from Asia-based Fullgoal and Lion Asset Management companies were found to have thermal coal intensities (defined as tons per $million AUM) 50 times greater than the MSCI World ETF because of their large stakes in major Chinese coal producers. A range of other funds also contained major fossil fuel producing companies which investors would no doubt be surprised to find in a purportedly green fund: BlackRock’s iShares MSCI ACWI Low Carbon Target ETF, for example, holds shares in oil majors Chevron and Shell.

    Notably, all four funds available to Canadian retail investors, with an aggregate AUM of $186 million, were found to have zero exposure to fossil fuel reserves. The funds, whose managers include RBC and BMO, are detailed in the table below.