Climate-change ETFs: dead weight in the fight against global warming? – Wealth Professional
Analyzing Europe-listed ETFs from managers including Amundi, BNP Paribas, BlackRock, and HSBC with underlying indices from MSCI, FTSE Russell, and S&P Dow Jones, Edhec found 35% of constituent companies with worsening environmental performance are given increased weighting within the funds. The figure rises to 41% of stocks with deteriorating carbon intensity, which is measured by emissions per unit of output.
An unfortunate upshot, the paper said, is that the ETFs effectively suck up capital that could and should have gone to sectors that are playing a central role in the transition to a cleaner economy.
“Since considerable investment is necessary to ensure electrification of the economy and decarbonisation of electricity, underfunding of this sector in climate-aligned benchmarks … would constitute the most dangerous form of portfolio greenwashing,” Felix Goltz, co-author of the paper, told the Financial Times.
According to Goltz, the divergence between the climate performance and the portfolio weightings of the companies held by climate ETFs takes away the credibility of the efforts that the investing companies undertake to engage those companies to improve their ESG practices.
The inconsistency between investment and ESG performance, he argued to the Times, stems from climate funds’ fixation on absolute climate performance scores, while overlooking ESG momentum. Because the constituent companies are not penalized as long as do not trip a defined lower bound in ESG scoring, their performance can theoretically drift downward to a certain degree without consequence.