Fast fashion brands, fossil fuel companies, and SUV manufacturers are featured in EU-regulated “sustainable” funds that claim ethical credentials in their names, according to revelations by the Guardian and its media partners.
Approximately $18 billion (£14 billion) of these investments are directed towards the 200 largest polluters.
Investors hold over $87 billion (£68 billion) in funds that disclose their environmental and social impacts under EU sustainable finance regulations.
This includes significant investments in major emitters of greenhouse gases, as highlighted by data from the last quarter of 2023. About one-fifth of this $87 billion is invested through funds that market themselves with eco-friendly terminology.
Campaigners are urging stricter regulations on labeling, arguing that the current system misleads investors and results in ordinary people unknowingly contributing to climate change.
“Pension savers and the general public are being misled when it comes to sustainable finance,” said Lara Cuvelier, a sustainable investment campaigner at Reclaim Finance.
The investigation, conducted by Voxeurop, identified the top 25 polluters in each of the eight most carbon-intensive sectors and tracked investments from funds that disclose under the EU’s sustainable finance directive.
The majority of investments in the 200 largest polluters were from funds classified under Article 8, which promotes environmental or social goals. An additional $2 billion came from funds classified under Article 9, which focuses on sustainable investment.
These classifications were not intended for marketing purposes, but they are often used to highlight a financial product’s environmental credentials.
This month, the European Securities and Markets Authority (ESMA) and European banking and insurance regulators called for significant reforms to address greenwashing.
“Status as ‘Article 8’ or ‘Article 9’ products has been used since the beginning in marketing materials as ‘quality labels’ for sustainability, leading to greenwashing and mis-selling risks,” said the watchdogs. They advocated for simpler product categories that are more transparent for investors.
Campaigners have criticized the extent of misuse. The analysis revealed that $11.7 billion of investments in the largest polluters came from funds with “ESG” – environmental, social, and governance – in their names.
An additional $1.1 billion came from funds with climate-specific terms like “clean,” “transition,” “net zero,” and “Paris.”
The latter terms reference the Paris Agreement of 2015, aimed at limiting global warming to 1.5°C (2.7°F) above pre-industrial levels by the century’s end, necessitating rapid reductions in pollution to achieve net zero emissions by 2050.
Despite this, the top 10 recipients of EU-regulated green funds include fossil fuel companies and car manufacturers producing larger vehicles.
“Europe’s largest green portfolios are essentially the same dirty companies, repackaged as sustainable,” said Xavier Sol, the sustainable finance director at the campaign group Transport and Environment.
“We need private capital to accelerate the green transition rather than impede it,” he added. “Only investments designated for green activities should be labeled as sustainable.”
ESMA recently adopted updated guidelines prohibiting funds with substantial fossil fuel investments from marketing themselves as green.
However, these rules, effective later this year, are not legally binding, and national regulators may choose to ignore them.
Cuvelier stated that regulators have so far only provided incentives without enforcing strict measures. “We’re seeing now that it’s not enough,” she said.
The analysis also showed that one-quarter of investments in major polluters came from just 10 asset managers. Several of these managers claimed compliance with the EU’s regulatory framework and stated they would adjust policies if needed. They disputed claims that their investments conflict with climate objectives.
Amundi stated: “The energy transition will only occur if all economic players change. Amundi has a duty to support and encourage the transformation of all companies and sectors.”
Intesa Sanpaolo remarked: “Investments in high-carbon sectors do not conflict with the SFDR [sustainable finance disclosure regulation] goals of transparency in sustainability investments, nor with the Paris Agreement, which promotes a transition to a low-carbon economy.”
Fidelity said: “As active stewards of capital, we believe that fostering change through a positive engagement approach rather than exclusion (or disinvestment) policy is the most effective way to positively influence corporate behavior.”
Experts are divided on whether excluding major polluters from investment funds is beneficial. Campaigners argue that divesting from fossil fuel companies reduces their share prices and makes it harder for them to finance new projects, thus pressuring them to adopt greener practices.
Others caution that the financial impact on profitable oil and gas companies is minimal and that divestment campaigns are more effective in challenging their “social license to operate” than affecting their financial bottom line.
“Decarbonization is such a massive task that establishing a small ‘green niche’ of sustainable investment funds on its own will contribute very little,” said Jan Fichtner, a sustainable finance research fellow at the University of Witten/Herdecke. “
EU rules should focus much more on setting credible and binding minimum standards for proxy voting and private engagements – for both sustainable and conventional funds.”
