How much green energy is actually in sustainable investment funds?

How much green energy is actually in sustainable investment funds?

Today, sustainable investments in green energy stocks are more fashionable than ever. It’s why the international media project „Great Green Investment Investigation,“ conducted by Follow the Money and Investico, set out to evaluate more than 800 funds labelled as green. So, what were the findings of the project, you ask? To what extent do so-called “green” funds really include alternative energy stocks? 

Unfortunately, the reality isn’t so rosy. Quite a few funds advertise investments in sustainable companies, such as green energy stocks, but in many cases, they also (more quietly) turn around and invest heavily in coal, oil, or the aviation industry. It turns out that about 48 percent of all funds deemed especially green also invest in areas without any discernable ecological added value.

This green misnomer fools a growing number of investors that want to funnel their money towards alternative energy stocks. After all, green energy investments are highly desired politically and are encouraged in both the United States (US) and the European Union (EU). 

Does the EU allow fossil stocks to be labelled as green energy stocks? 

Such blatant mislabeling really shouldn’t be possible. After a while, the market for sustainable investments had become a jungle riddled with empty marketing words, so the EU Commission put their foot down last May when it issued a regulation classifying funds according to their true sustainability designation.

Funds in the new “Article 9” category, a category that includes the more than 800 funds evaluated for this article, have the highest pedigree of green credentials. Investors can reasonably expect that these funds include renewable energy stocks and stocks of other companies that help to solve the climate crisis. Under the designation, investments in climate-damaging industries — for instance, aviation or coal-fired power — should therefore be excluded.

Funds spread investments across alternative energy stocks–but also in fossil fuels and aviation

For the project, Follow The Money and Investico gathered information on the majority of mutual funds traded in Europe under the Article 9 designation. Most of these funds are also available in the U.S..

Next, the investigators compared the fund investments with data from the environmental protection organization Urgewald and the Climate Bonds Initiative (CBI), a financial research company from London. Essentially, Urgewald and CBI internally categorize how sustainable companies are according to their own metrics. The results, listed in the table below, are telling: Every second fund invests in fossil fuels and aviation, while among the top five worst performers, investments in renewable energy stocks are minimal. 

FundNumber of fossil investmentsNumber of total investmentShare of fossil investments in total fund volume
Principal Global Investors Funds – Global Sustainable113540.3%
Macquaire Fund Solutions – Macquaire Sustainable92440.0%
First Sentier Responsible Listed Infrastructure93934.2%
MSCI Europe Small Caps Ex Controversial Weapons54220.0%
Blackrock Global Funds – New Energy Fund44818.5%

Source: The Great Green Investment Investigation (2022)

My personal “aha” moment came when I learned more about the Principal Global Sustainable Listed Infrastructure Fund and the Macquarie Sustainable Global Listed Infrastructure Fund. Although their names both promise sustainability and a green ethos, in reality, they have each invested more than 40 percent of their capital in companies in the oil, coal, and aviation industries. It’s a bit like the International Organization of Good Templars investing two-fifths of its pension fund into breweries and distilleries. At the end of the day, both funds are still quite far from systematic investment in renewable energy and green energy stocks. 

Despite renewable energy stocks, Blackrock New Energy Fund among five ‘dirtiest’ funds

Pay no attention to the very green name: in reality, the Blackrock Global Funds – New Energy Fund, a major player in the alternative energy stocks fund market, also made the list for the top five “dirtiest” funds. Of almost six billion euros, Blackrock has poured 1.1 billion USD into four companies that also make money from fossil fuels: Nextera Energy Inc. (384 million USD), Enel Spa (323 million USD), RWE AG (312 million USD), and China Longyuan Power Group (82 million USD).

Basically, Blackrock confirmed the holdings in the companies and explained that its investments are classified as renewable energy stocks, so long as they meet the low bar of earning at least 25 percent of their sales in the renewable energy sector.

The Blackrock example illustrates the very gray area in which these funds operate, where so-called green energy is sometimes not directly recognizable for what it is. Two others further illustrate the point. The company China Longyuan Power Group, although technically classified as a green energy stock, operates coal-fired power plants. U.S.-based Nextera, although active in the green energy field and classified as an alternative energy stock, also has its fingers in drilling for gas and pipeline operation.

The EU: When only 100 percent counts

But then the question becomes: For how long can fossil energy stocks get away with being labeled green stocks? Over the past few months, a heated debate about supposedly sustainable investment products has begun to bear fruit. Numerous financial service providers, as well as the market leader Blackrock, are currently in the process of rearranging funds that had previously claimed a particularly high level of sustainability.

One of the key reasons for the reclassification traces back to the regular exchange between the European Union and financial supervisory authorities. For a long time, it was unclear by what metric an ambitious fund must be invested to be deemed sustainable. The recently published regulatory technical standards change the game, stating clearly that Article 9 funds should solely make sustainable investments.

Transition away from fossil fuels vs. green energy stocks

It’s fair to say that the 100 percent requirement caught many index fund providers off guard, including Blackrock. For example, they labeled products based on indices from the world’s largest provider, MSCI, with the Article 9 label. These indices’ compositions favor companies that are on the path to significant future reductions in greenhouse gas emissions, but that currently have nothing to do with stocks in green or renewable energy. The fund providers consider this so-called transformative approach to be incompatible with the EU authorities’ requirements, which are now based on already fully sustainable investments.

In the U.S., the Securities and Exchange Commission has proposed rules requiring firms to produce more data to justify any environmental, social, and governance labels. These proposed rules aim to standardize sustainability disclosure practices to stop funds and investment advisers from “greenwashing” investment decisions. But clearly, the U.S. lags behind the EU on this important issue.

Pure Climate Stocks are about 100 percent

According to investment experts, a fund with exclusively sustainable investments only seems feasible, if the fund is not based on an index, where there are subject orientations–for instance, a sole concentration on renewable energy stocks. But with a broader product, such an arrangement doesn’t really work.

So, what’s the bottom line here? Don’t be fooled by the financial industry’s impressive-sounding terminology. At the end of the day, these funds will only move as far as the authorities require. When they heard “sustainable investing“, it initially only meant big business and greenwashing. This fact was the kick-starter for Pure Climate Stocks, where you can take your own fate in your hands and start investing with 100% climate impact now. 

Join our advanced online training course and build your own profitable, diversified portfolio of stocks that deliver 100% climate impact. You will learn a proven, easily applied, and practical method for achieving financial success with Pure Climate Stocks.

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