Over $1.5bn in “Environmental, Social and Governance” (ESG) funds has been invested in the bonds of major coal, oil and gas companies, according to a new analysis by the progressive think tank Common Wealth.

As of April 2023, the three top global asset management firms BlackRock, State Street, and Legal & General were named in the report to hold nearly $1bn ($999.5m) in bonds issued by fossil fuel companies through “ESG” labelled funds.

In its research, Common Wealth also noted that many top companies have increased their exposure to fossil fuel bonds since February 2023, and that State Street has added over $100m in coal, oil and gas bonds to its ESG portfolios over this period.

“Investors must accept their role in the climate crisis and deny debt to companies expanding fossil fuel production.”

Nick Haines, Campaigner Manager, Ekō/the Toxic Bonds Initiative

“A quick search of Environmental, Social, Governance funds against corporate bonds issued by coal, oil and gas companies shows that these funds invest at least $1.5bn in coal, oil, and gas companies to date,” said Sophie Flinders, Analyst at Common Wealth. “Rather than being a climate-conscious choice for investors, ESG funds are propping up the fossil fuel giants.”

She says these happenings are in need of tighter regulation on funds from the FCA and index providers. “But they don’t address the fundamental issue: financial returns for investors are taking primacy over protecting the climate.”

Investor deception

Common Wealth argues that current strategies within the financial sector fail to offer a meaningful and sufficient response to the climate emergency.

And that it raises questions on how to make up for the shortfall of investment in the green transition, where the group states that the most effective tools are via public investment and public coordination.

Nick Haines, Campaigner Manager at Ekō/the Toxic Bonds Initiative, called out ‘so-called’ ESG funds and said that they cannot be trusted. “Fund managers can no longer rely on the excuse that they just blindly track an index: they have a fiduciary duty to avoid investor deception. Corporate bonds are the asset class that increasingly underpin the world’s dirtiest industries. Investors must accept their role in the climate crisis and deny debt to companies expanding fossil fuel production.”

Greenwashing funds

The Carbon Tracker Initiative has also found that assets managers have invested $400bn in oil and gas funds, despite climate commitments.

Their report Missed Pitch, has identified 25 members of the Net Zero Asset Managers’ initiative (NZAM) that could be misleading investors, and also putting funds at risk by holding assets in 15 of the world’s largest listed oil and gas companies like ExxonMobil, Chevron and TotalEnergies. None of those companies align with the Paris climate target.

“Asset managers that join coalitions such as the Net Zero Asset Managers Initiative are signalling to the market that they will invest in line with the Paris target of holding global warming to 1.5°C. If they invest in oil and gas companies that are that are not aligned with this target, they risk their reputation among climate-conscious asset owners while other investors may increasingly be concerned over exposure to energy transition risk,” said Maeve O’Connor, Associate Analyst, Oil, Gas and Mining and the report’s author.

It was also found that more than 160 funds labelled with “ESG”, “sustainable”, “climate”, “carbon” and “transition” hold $4.6bn of funds in these 15 companies.

“Rather than being a climate-conscious choice for investors, ESG funds are propping up the fossil fuel giants.”

Sophie Flinders, Analyst, Common Wealth.

According to the International Energy Agency, both oil and gas production needs to fall by 75% by 2050 to be able to meet the global CO2 goalof 1.5°C. But a majority of the 15 companies intend to increase their production instead of slowing down says the initiative. They hold a “significant portfolio of potential production assets which are unlikely to be financially viable in a low-carbon future”.

Mike Coffin, Head of Oil, Gas and Mining and the report’s co-author, said: “The energy transition from fossil fuels to clean technologies is well underway and is likely to gather pace as the damaging impacts of climate change drive bolder government policies. Growing numbers of investors want to support this transition, and are seeking to align their portfolios with 1.5°C. However, it’s hard to see how they can do this with credibility if they own financial interests in oil and gas companies that are not themselves aligned with the Paris target.”