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Record breaking growth for index-tracking exchange traded funds represents a “recipe for climate chaos” according to a new study that blasts asset managers for failing to reduce coal exposures in passively managed investment portfolios.
The researchers contend that pledges by asset managers to reduce carbon emissions to net zero across their portfolios are “little more than hot air” in the absence of concrete steps to eliminate coal investments.
Reclaim Finance and Urgewald, two non-profit environmental campaigning groups, analysed a sample of 29 leading asset managers between February and March this year, which together oversee $41tn (€34tn) in both passive and active investments globally, and found just a quarter of these were covered by coal exclusion policies.
The failure to tackle coal investments was even more stark for the largest passive managers for which data was readily available: BlackRock, Vanguard, State Street, Invesco, JPMorgan, UBS, Legal & General Investment Management, Amundi and DWS.
Less than 3 per cent collectively of the €13tn in passively managed investments run by these nine managers was covered by coal exclusion policies, said Reclaim Finance.
Investors have ploughed net inflows worth almost $4.5tn into ETFs over the past decade, according to ETFGI, a London-based consultancy. The overwhelming majority of those inflows have gone into ETFs that track market capitalisation weighted indices, benefiting largest companies the most because the money follows companies based almost entirely on their size.
Asset managers outsource decisions about the design of index funds to third party providers, such as MSCI and S&P Global, that decide which companies to include in their benchmarks.
Lara Cuvelier, sustainable investments campaigner at Reclaim Finance, said asset managers could do more to encourage index providers to exclude coal producers from standard market cap indices, a practice that applies to manufacturers of controversial weapons.
“Investing in ETFs and other tracker funds that blindly follow market cap indices means greatly contributing to climate change. Passive managers will become the holders of last resort for coal assets unless they take action,” said Cuvelier.
Cuvelier said a “dangerous gulf” existed between words and actions as only 13 of the 29 managers had formally adopted any kind of coal policies. Only two, Ostrum and Axa Investment Managers, had coal policies that could be judged as “robust” according to Reclaim Finance.
“Asset managers must decarbonise their entire portfolios if they want their climate commitments to mean anything. Asset managers have rained down net zero commitments in recent months but our analysis exposes these pledges as little more than hot air,” said Cuvelier.
BlackRock and Vanguard, the world’s two largest asset managers, control positions worth $84bn and $86bn respectively in companies that produce or burn thermal coal, according to an earlier analysis by Reclaim Finance.
Both managers have signed up to the Net Zero Asset Managers Initiative, which was launched in December to support the goal of achieving net zero greenhouse gas emissions by 2050 or sooner.
Where climate change meets business, markets and politics. Explore the FT’s coverage here
Vanguard said that divesting from carbon-intensive companies was not an option for broad based passive funds.
“We regularly engage with the boards of carbon-intensive companies and make clear our expectations that they pursue globally accepted climate risk mitigation targets. These conversations will continue, and importantly, complement our work with the Net Zero Asset Managers Initiative,” said Vanguard.
BlackRock said that it provided clients with choices across its range of index-tracking funds which included ESG strategies.
“We ask all companies to disclose their plan for alignment with a global net zero economy by 2050. Where we do not see sufficient progress, we take voting action,” said BlackRock.
The Net Zero Asset Managers Initiative gained 14 new members this week, expanding the number of signatories to 87 with nearly $37tn in combined assets.
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