Findings based on a study from researchers at the Stockholm Resilience Centre and KTH The Royal Institute of Technology
Photo credit: Allison Saeng / Unsplash+
As reported by the Stockholm Resilience Centre, a study from researchers at the Centre and at KTH The Royal Institute of Technology has analysed nearly 7,000 European funds. They found that most “green” portfolios mirror conventional ones – except in one sector.
"For many savers today, investing isn’t just a financial activity; it’s also a way to support the kind of world they want to live in. Today, the majority of European retail funds are classified as Article 8 or 9 – Article 9 are funds with sustainability as their primary objective, Article 8 are funds that promote environmental or social characteristics alongside financial goals (see box for more info). That means that millions of savers are putting their money into products they believe are greener", the Stockholm Resilience Centre outlines.
"To understand whether green-labelled funds deliver on that promise, a research team including Centre researchers Giorgio Parlato and Beatrice Crona examined the individual holdings of 6,888 funds across Europe. To compare the funds, the team used a method originally developed in ecology to analyse the similarity of species in different habitats."
The findings were published in the European Journal of Finance,
“Green funds often look strikingly similar to conventional funds,” says lead author Mark Sanctuary from KTH The Royal Institute of Technology. “When you compare the assets they hold – and in what proportions – the differences are surprisingly small, despite the extensive EU regulation aimed at ensuring transparency.”
Part of the problem, he explains, is the inconsistency in how companies are evaluated. Different rating agencies often give different scores to the same company. For example, there’s often a confusion about what’s being measured – is it the company’s actual impact on society or the planet or is it just measuring how exposed the company is to a financial risk from environmental issues?
“This is a clear sign that the EU’s regulatory efforts on sustainable finance are too soft on anti-greenwashing measures,” says Centre researcher Beatrice Crona. “As a result, green investing is doing very little to shift actual investment allocations.”
The Stockholm Resilience Centre outlines further: "The study shows that the most common strategy for constructing a green fund is to take a broad, conventional portfolio and remove certain companies, typically those linked to fossil fuels, tobacco, or weapons. This so-called negative screening may reduce controversy, but it doesn’t automatically redirect money toward truly sustainable or forward-looking businesses.
The result is that many green funds offer limited diversification compared with standard funds: in practice, investors are often buying a trimmed version of the same market."
Energy - Green Funds Divergence from Conventional Funds
There is, however, one place where green funds do diverge from conventional ones: energy. Here, the researchers identified a consistent and meaningful difference between the fund categories.
According to the researchers, this is due to better data. Carbon emissions are tracked more accurately and that makes it easier for managers to select climate-aligned companies. Also, clean energy technologies have become financially competitive, with EU climate policies strenghtening their position at the same time.
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