Is it acceptable that climate funds have a higher carbon exposure?
Pardon the Interruption
This article is just an example of the content available to mallowstreet members.
On average over 150 pieces of new content are published from across the industry per month on mallowstreet. Members get access to the latest developments, industry views and a range of in-depth research.
All the content on mallowstreet is accredited for CPD by the PMI and is available to trustees for free.
A study comparing seven climate funds found that only half have consistently lower carbon exposure than the MSCI World Index. Should investors be worried about this?
Financial data provider Investment Metrics has compared seven climate funds – by three French, one German, one Swiss and two US fund houses – finding that of these top-selling climate funds, only half had consistently lower carbon exposure than the MSCI World, which has no carbon tilt, over the past two years.
Beliefs about future vs numbers from the past
High emissions look contradictory when considering that these funds claim to be climate conscious. However, the report itself states that “climate funds in general are keen to favour investing in firms that are part of the transition to the low carbon economy”. This means asset managers look to expected rather than current carbon intensity, which tends to lead to portfolio overweights in energy and industrials.
Analysis of past data “only gets us so far”, argued Mike Clark, founder director of Ario Advisory. “What investors are really interested in is the fund manager’s investment beliefs around climate change and how they are implemented in crafting the portfolio. How strong is the board’s commitment to the transition? Is the manager looking at the percentage of capex which is green? What assumptions is the manager making about carbon pricing, and government policy?” he said.
Nick Spencer, founder of Gordian Advice, agreed that “there are good reasons why a 'climate fund' may be higher carbon intensity than MSCI”, because such funds engage in solutions and industry, rather than investing in ‘light’ and non-involved sectors.
However, the pensions industry is not all in agreement on the approach to take. Fintech firm Cushon, for example, prides itself on its ‘net zero now’ pension option. Pension scheme members do not want to wait until 2030 or 2050 to decarbonise their pension, it suggests, arguing that 68.6% of employees are concerned their pension could be investing in businesses that are contributing to the climate crisis.
The question of whether investors should seek to be net zero now or work with industry to help them become net zero could however become increasingly divisive, especially if new labels are introduced for retail products. The Financial Conduct Authority is currently seeking views on ESG labels.
Should asset managers and owners engage to drive decarbonisation - or cease to finance polluting industries by going net zero now?
