Top climate funds have bigger carbon footprint than the index

The portfolios of some of Europe’s most popular climate funds have a proportionally greater carbon footprint than the wider stock market, according to new research carried out by Style Analytics.

The London-based investment consultancy analysed five of the continent’s top-selling funds with a focus on ‘climate investing’ to identify how their credentials stacked up on ESG, or environmental, social and corporate governance issues.

They found that the €3.9bn Nordea 1 – Global Climate and Environment and €1.5bn BNP Paribas Climate Impact funds, two of Europe’s largest environmental strategies, had both been more ‘carbon intensive’ than the MSCI World index for much of the previous year and a half. 

The finding illustrates the ambiguities in the developing area of climate investing, given that gaps in the current methodology mean companies which tackle climate change directly can often register as having relatively high carbon footprints. 

Specifically, the researchers compared the ‘weighted average carbon intensity’ of the funds with the index, which covers global developed markets.

The metric represents tonnes of carbon dioxide and equivalent greenhouse gas emissions which companies are directly responsible for, divided by their revenue in millions of US dollars. The results are then ‘weighted’ according to position size, putting a single figure on a fund’s carbon footprint.

This is the ‘standard measure’ looked at, according to Damian Handzy, head of research at Style Analytics, which is used by asset managers like Aberdeen Standard Investors and Invesco.

On that basis, the Nordea Asset Management fund was more carbon intensive than the index for the entire period examined, from the start of 2019 to June this year.

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The BNP Paribas fund, managed by Impax Asset Management on behalf of the French bank’s asset management arm, had a larger carbon footprint for most of the period, although that had dropped below the benchmark as of June.

For ‘weighted average carbon intensity’, the MSCI World averaged roughly 180 tonnes of carbon dioxide and equivalent emissions per company divided by its revenue in millions of US dollars, weighted accorded to size in the index, according according to Style Analytics.

The Impax fund scored between 250 and 200 for most of the timeframe, while the Nordea fund scored continually greater than 200 and for a short period rose above 300.

Handzy expressed surprise at the findings and in particular how much more polluting the funds appeared than competitors.

‘It’s one thing to say it’s slightly above, because every measure is imperfect,’ he said. ‘But this carbon intensity measure is consistently above. We’re not talking about millimetres here. We’re talking about materiality.’

Two of the other funds examined – the passive Amundi Index MSCI Global Climate Change and CPR Invest Climate Action – consistently came in close to 100, while the DWS Invest ESG Climate Tech fund had a lower carbon footprint than the index except for a two-month period.

‘Remember its shortcomings’

Nordea’s head of responsible investments Eric Pedersen accepted the basic findings but said one metric could not explain the whole picture.

‘The fact that the carbon footprint of our Climate & Environment fund is sometimes higher than the benchmark is something we are very open to our clients about, and reflects the complexities of climate investing,’ he said.  

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Pedersen said the strategy looked for companies which actively contribute to reducing and avoiding greenhouse gas emissions across the economy, thereby facilitating the climate transition.

‘This means that the sector allocation can skew towards higher-emitting sectors, for example industrials,’ he said.

‘And even if the individual companies do better than their peers and through their products contribute to lowering emissions across the economy, this can still mean a higher footprint than a “climate” portfolio that just seeks out low emitters, irrespective of what they do.’

Nordea provide details of its funds’ carbon footprints to investors, saying that was partly because the metric gave an approximate indication of exposure to climate transition risk, but Pedersen added it was important to ‘remember its shortcomings’.

As well as failing to account for variations among sectors, the measure does not reflect avoided emissions – such as from the fund’s holding in Vestas (VWS.CO), a leading wind turbine manufacturer – or ‘scope 3’ emissions.

The latter category would include all indirect emissions related to a company’s ‘value chain’. That would provide a fuller picture than just direct emissions and those derived from purchased energy, the factors considered in carbon footprint currently. For example, an automobile manufacturer’s scope 3 emissions would include emissions from people driving its vehicles or in its supply chain.

In the case of an oil and gas company, Nordea estimated that scope 3 would account for 85% of its total emissions, reflecting the shortfall in the current model. 

‘Does not capture positive impact’ 

Impax, which runs the £967m Impax Environmental Markets (IEM) investment trust along similar lines to the Climate Impact fund, also said a significant factor was the fund’s structural overweight to industrials. These are companies which have manufacturing facilities and make products that address environmental problems.

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‘Conversely, within a global index you will find a lot of asset-light companies like financials and software businesses which tend to only have offices and therefore a lot lower emissions,’ said an Impax spokesperson.

‘We think that the carbon footprint of a portfolio is an interesting but incomplete metric as it does not capture the positive impact that products like insulation panels and wind turbines have around reducing carbon emissions.

‘That was one of the reasons we started our impact work five years ago where we include both carbon emitted and avoided to calculate a “net carbon footprint”. This demonstrates that our companies actually help avoid more carbon emissions than what they generate from their operations.’

Looking more broadly, in almost all cases the five funds did score better than the index on overall ESG ratings assigned by major providers, Style Analytics reported.

Handzy explained they had not picked the biggest European climate funds in the research, but rather a representative sample, including trackers like the Amundi index fund, which is weighted towards companies with low emissions and fossil fuel reserves.



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