How climate friendly is your capital?

To celebrate New York Climate Week, we measured the SDG impact of every US-domiciled fund.

View from the top

💸 Winter is coming, and soaring gas prices—455% in 12 months—are creating a headache for leaders trying to balance national needs and emissions targets. Good news for the UK: its first green gilt sale drew £10bn to help it meet both demands.

🌱 Mark Carney launched the Net Zero Financial Service Providers Alliance: the newest addition to the UN’s Race to Zero campaign. Bringing together 17 high-profile inaugural members, the alliance aims to green global financial institutions.

🔬 Two little-noticed developments in Australia and the Netherlands underscore the fact that regulators worldwide are ramping up scrutiny of ESG claims, reports the FT. Meanwhile, the SEC is taking aim at traditional materiality tests and greenwashing.

⚖️ Is the trillion-dollar ‘win-win’ fantasy of ESG distracting from a real economic reset? Finance can be a source of positive change, writes Kenneth Pucker, but only impact measurement can separate ESG-marketed funds from ESG-committed funds.

🚨 Climate change ETFs are undermining the war on global warming by routinely engaging in greenwashing, finds EDHEC. In a new report, the business school reveals ETFs additionally starve sectors of capital to invest in transition to cleaner energy.

How Earth friendly are ESG funds?

ICYMI, it’s New York Climate Week. To celebrate, we downloaded every N-Port from the SEC, separated the sustainable from the non-sustainable, and ran the respective groups through our machine-learning models. As you do.

Our objective was to discover the degree to which ESG funds, relative to their vanilla peers, contribute to the 17 UN Sustainable Development Goals (SDGs).

The results were sobering. In terms of both exposure and impact, ESG funds hardly deviate from the mean.

The good news? They do a little better on 16 out of 17 SDGs. The bad? Neither group achieves a positive impact on a single environmental SDG. Of the sustainable fund group, only four performed positively on all five environmental SDGs.

Corporate disclosures and policies are the remit of ESG analysis. We measure impact instead, evaluating companies as an aggregation of their products and services, which are scored according to their geographic-adjusted, real-world outcomes.

It’s an important distinction. While your ESG vehicle of choice may be brimming with companies committed to net zero tomorrow, your capital is likely contributing to environmental degradation today.

The environment is the greatest, unequivocal casualty of all invested capital.

ESG serves an important purpose but conceals a critical truth: unmitigated global economic growth is bad for the planet.

Key findings

Greenwashing is rife. Do you get what you pay for?

In terms of exposure and impact, the two fund groups are similarly aligned.

At a sector, industry and company level, the sustainable funds hardly deviate from the mean—despite a higher average fee for the former.

That difference doesn’t translate into meaningful positive impact. On an aggregated SDG basis, sustainable funds perform just two percentage points higher.

Investors claim to be ESG, but there’s little mandate to match words with action or intent with impact. 

Investing is bad for the planet. Is your capital doing much good?

The SDGs address three themes—planet, people, and prosperity. Both fund groups have a positive impact on the four ‘prosperity’ goals, a slight positive impact on the eight ‘people’ goals and a negative impact on the five ‘planet’ goals. 

Of the 77 funds branded with the terms ‘green’, ‘clean’, ‘climate’, or ‘sustainable’, only four have a positive impact on the environmental SDGs.

We assess the impact of capital on the world, not that of the world on companies. It doesn’t look good for the world.

Impact is hard to predict. How do you meet your goals?

There’s no such thing as a wholly ‘good’ or ‘bad’ company or fund, but positive and negative relationships arise between ostensibly uncorrelated investments and SDGs. 

Sustainable funds are more likely to focus on female-led businesses but don’t outperform on SDG 5 because they fail to invest in female welfare globally. They’re underexposed to healthcare but outperform on SDG 3 because they’re overexposed to transport and underexposed to energy (find out why that matters in the full report).

The chaos creates challenges, but opportunities, too. It’s hard to balance purity and liquidity in a portfolio focused exclusively on the most obvious contributors to a sustainability theme. Taking into account the full value chain of a theme yields more sources of diversification and alpha.

Machine learning, which can identify patterns at scale and without bias, makes sense of the noise. Technology will be a critical lever in achieving impact.

Download full report

We haven’t publicly named and shamed (yet), but you can get in touch for more information on individual funds.