Our newest analysis finds that "Environmental, Social and Governance" (ESG) funds have invested over $1.5 billion in the bonds of major coal, oil and gas companies — calling into question the credibility of sustainability claims.

ESG investment funds are an increasingly popular product sold by major asset management companies, claiming to offer a sustainable and socially responsible option for investors and a pathway for greening the financial system. However, there remain serious doubts about whether ESG products comply with their claims or marketing, let alone about the ability for the ESG approach to ever deliver on its stated ambitions.  

In our latest research, we find that three of the top asset management firms worldwide – BlackRock, State Street, and Legal & General — alone hold nearly 1 billion US dollars ($999.5m) in bonds issued by fossil fuel companies through their “ESG” labelled funds as of April 2023. 

While this figure provides only a snapshot, we also note that several top firms have increased their exposure to fossil fuel bonds since February 2023, with State Street adding over $100 million in coal, oil and gas bonds to its ESG portfolios over this period.

[.img-caption][.img-caption-header]Figure 1 "Environmental, Social and Governance" Fixed Income Funds Invest $1.5 billion in Coal, Oil and Gas Companies[.img-caption-header][.img-caption-text]"ESG" labelled funds, bonds issued by companies on the GOGEL and GCEL lists 2022, extra taken from February 2023 and April 2023[.img-caption-text][.img-caption-text]Source: Refinitiv Eikon, Urgewald[.img-caption-text][.img-caption]

In a previous 2020 report, we examined whether the green credentials of ESG financial products live up to their claims. The research analysed over 10,000 mutual funds and ETFs registered for sale in the UK. The report found that in Q1/Q2 2020 a third of the 33 climate-themed funds registered for sale in the UK were invested in oil and gas producing companies. Perhaps more critically, the analysis also found ESG funds were primarily invested in tech and financial companies, with clean energy investments representing a tiny proportion of the average portfolio. These findings are consistent with many of the top ESG funds offered by leading managers, which are often only modestly different to mainstream index funds such as those based on the S&P500. For instance, in the flagship US ESG fund of Vanguard, a leading US-based asset management giant, the top five holdings, representing over 20% of the fund’s assets, are Apple, Microsoft, Amazon, NVIDIA (a computing firm) and Alphabet (Google) — rather than firms involved in clean energy, transport or other sectors driving forward decarbonisation.

As our Research Director Adrienne Buller explains in her book, The Value of a Whale: 

“At its core…ESG investing is not a framework whose purpose is to drive change in the real economy. It is a strategy based on reducing financial impacts, not material ones – that is, the actual impacts of economic activities on the climate and environment. Sometimes these two issues overlap, but this is by no means necessary, or even common. Rather, ESG offers a mechanism for investors to minimise ‘exposure’ to financial risks — whether incoming regulation to end fossil fuel extraction or an exposé on a clothing manufacturer’s human rights violations – that could harm their portfolio’s financial returns. In other words, ask not what your portfolio can do for the climate crisis, but what the climate crisis will do to your portfolio.” 

Common Wealth argues existing financial sector strategies fail to offer a meaningful, let alone sufficient, response to the climate emergency — with the scale of investment in clean energy falling far short of what is needed. This raises key questions around the need for making up the shortfall of investment in the green transition, with Common Wealth arguing public investment and public coordination are the most effective tools. 

The new analysis from Common Wealth kicks off a research programme examining the relationship between the corporate bond market and the green transition.

[.quote][.quote-text]A quick search of Environmental, Social, Governance funds against corporate bonds issued by coal, oil and gas companies shows that these funds invest at least $1.5 billion in coal, oil, and gas companies to date. Rather than being a climate-conscious choice for investors, ESG funds are propping up the fossil fuel giants. Calls for tighter regulation of ESG funds from the Financial Conduct Authority and index providers are a step toward recognising the problem. But they don’t address the fundamental issue: financial returns for investors are taking primacy over protecting the climate.[.quote-text][.quotee]Sophie Flinders, Analyst at Common Wealth[.quotee][.quote]

[.quote][.quote-text]So-called ESG funds cannot be trusted. Fund managers can no longer rely on the excuse that they just blindly track an index: they have a fiduciary duty to avoid investor deception. Corporate bonds are the asset class that increasingly underpin the world’s dirtiest industries. Investors must accept their role in the climate crisis and deny debt to companies expanding fossil fuel production.[.quote-text][.quotee]Nick Haines, Campaigner Manager at Ekō/the Toxic Bonds Initiative[.quotee][.quote]

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Methodological Notes:

Financial holding data is derived from Refinitiv eMaxx database. The universe of coal, oil and gas bonds derives from the Global Coal Exit List and Global Oil and Gas Exit List. "Green bonds" issued by fossil fuel companies are excluded from these lists. Funds were considered "ESG" for the study based on the presence of the label "ESG" in the fund name, meaning the findings are likely to understate total exposure, as some funds investing according to "ESG" strategies are not explicitly labelled as such.