ESG roundup: Asset managers still invest in assets misaligned with Paris Agreement

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Asset managers wordwide have not made significant progress on climate goals since 2021, despite an increase in climate targets through Net Zero Asset Managers (NZAM) and similar initiatives, according to a recent report, which claims that 45 of the world’s largest asset managers – with $72trn in cumulative assets under management – continue to hold equity investment portfolios misaligned with Paris Agreement goals.

FinanceMap’s latest report – Asset managers and climate change – assesses the managers’ equity portfolios, stewardship, and sustainable finance policy engagement activities.

It also shows that the asset managers efforts to drive the transition through stewardship have stagnated and that they do not show active and effective support for climate finance policy required to enable decarbonisation pathways.

Across the board, the world’s largest asset managers’ equity funds continue to invest in companies misaligned with net zero goals. This research was able to analyse $16.4trn of the asset managers’ equity fund portfolios, according to the report.

Of the portfolios assessed, 95% are misaligned with the goals of the Paris Agreement. Meanwhile, the asset managers collectively hold 2.8 times more equity value in fossil fuel production companies ($880bn) than in green investments ($309bn) in the assessed sample, the research revealed.

The report showed that the assessed equity funds for Goldman Sachs and State Street Corporation are the most exposed to the fossil fuel production value chain, both with 2.2 times higher exposure to the sector than the average asset manager.

The most robust climate stewardship continues to come from European managers Legal & General Investment Management, UBS Asset Management, and BNP Paribas Asset Management, as well as Federated Hermes. All show clear evidence of engagement with companies on the transition of business models and are active members of Climate Action 100+ (CA100+).

This is in stark contrast to the big four US asset managers BlackRock, Vanguard, Fidelity Investments, and State Street Global Advisors. All of these asset managers received a FinanceMap Stewardship Score of C+ or lower, indicating a lack of effective climate stewardship processes and use of shareholder authority to engage companies to transition.

“It’s clear that in Europe, there’s a ‘tailwind’ of climate-conscious regulation and standard setting that provides cover to asset managers to demand more ambitious action. In the US, it seems that the opposite is currently true. So, the report shows the same transatlantic divide that we’ve seen in Morningstar’s own research, where European managers have shown a higher level of support for ambitious net zero action than their US peers,” said Lindsey Stewart, director of investment stewardship research at Morningstar, commenting on the report.

Article 8 funds suffer outflows of €14.6bn, says Morningstar report

Article 8 funds suffered net outflows of €14.6bn in the second quarter of 2023, amid continued macroeconomic pressures, according to Morningstar’s latest report SFDR Article 8 and Article 9 funds: Q2 2023 in review. The outflows disproportionally affected the Article 8 funds with no commitment to sustainable investments.

Furthermore, the report showed that investors continued pouring net new money into Article 9 funds, but the €3.6bn these attracted represent the lowest inflows on record for such products. Assets in Article 8 and Article 9 funds rose by 1.4% over the second quarter and for the first time passed the €5trn milestone.

The research also showed that reclassifications slowed. About 180 funds upgraded to Article 8 from Article 6, while only six downgraded to Article 8 from Article 9. Seven Handelsbanken Paris-aligned index funds, which were previously downgraded to Article 8 from Article 9, reverted to Article 9.

Asset managers continued fine-tuning their sustainable investment definition and measurement in portfolios. In the past three months, 190 Article 8 funds updated their minimum sustainable investment allocations, according to Morningstar, which claimed that asset managers are increasingly keen to add carbon emission reduction objectives to their strategies.

Close to 600 Article 8 and Article 9 funds now report having a carbon reduction objective, Morningstar added.

Hortense Bioy, global director of sustainability research at Morningstar, said: “Despite the continuously challenging macro environment and the net outflows, assets in Article 8 and Article 9 rose over the second quarter. Funds claiming some degree of greenness passed the €5trn milestone for the first time, driven by newly-launched funds, product upgrades and, to a lesser extent, market appreciation.”

GSS bonds could claim EU green bond standard label

Green, social and sustainability (GSS) bonds could claim the upcoming EU Green Bond Standard label, with the lowest share coming from government bonds and the highest from non-financial corporates, according to MainStreet Partners’ GSS Bonds Market Trends report.

The report – which uncovers compelling insights that demonstrate the pivotal role of European Taxonomy and green bonds – revealed that 28% of outstanding green and sustainability bonds could claim such label.

The European Union announced earlier this year that it would launch a framework to standardise bond products that specifically fund the low-carbon transition. This would be known as the European Green Bond Standards (EUGBS).

The report also delves into the interconnectedness of the European Taxonomy and the European Green Bond Standard with the GSS bonds market, and their collective role in driving sustainable investments to address climate change challenges.

Jaime Diaz-Rio Varez, research associate at MainStreet Partners, said: “The European Union, both as a regulator and as an issuer, has shown real interest in the green bond market, proposing a ‘gold’ labelling scheme and establishing the largest green bond scheme in the world.

“Closely monitoring the credentials of green bonds and their environmental impact will be key to facilitating a smoother transition. This is especially true for the real estate sector, where substantial risks and opportunities will support a strong growth in the issuance of GSS bonds.”

The research also showed that real estate accounted for over 12% of GSS bonds issuance in 2022. Physical transition and regulatory risks are just some of the incentives for accelerated investments in buildings’ renovation, a key project financed by the Green Buildings Use of Proceeds.