Climate-friendly investments: beware of “greenwashing”

Investing your savings in investments making it possible to act against global warming: this is the great promise of “climate” funds. Faced with the enthusiasm of investors – private savers as well as professionals – the offer is multiplying, draining substantial savings flows. According to Morningstar, in the first quarter of 2021, of the top ten funds in the world, six were climate-focused media.

But a study by the Scientific Beta research chair of the Edhec Business School, published at the end of September, draws a very harsh report on these products.

According to its authors, climate funds are not fulfilling their promises. Worse, they engage in greenwashing by communicating widely about their use of climate-related data while the latter is marginalized in their investment strategies.

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“Greenwashing is very simple, says Noël Amenc, finance professor at Edhec and co-author of the study with Felix Goltz and Victor Liu. It is enough to say that one uses extra-financial data and in fact not to use it. We manage to still have good results in order to be able to communicate on the reduction of the carbon footprint or on the temperature of the fund. “

The climate objective not always well defined

To reach these conclusions, the researchers looked at the composition of “climate” stock market indices over a ten-year period (2011 to 2020). These indices are widely used in finance because they serve as a benchmark for funds. Exchange-traded funds (ETF) type index products even simply replicate them. Their names are evocative: MSCI World Climate Change, FTSE Developed ESG Low Carbon Select, S&P 500 Paris-Aligned Climate…

However, the study shows that climate data “Represent on average only 12% of the determinants of the equity weighting of the portfolios”. In other words: the construction of these indices is based 88% on very traditional financial criteria and in particular on the market capitalization of the companies. This is even more marked in strategies displaying a broader objective, such as ESG (environment, social, governance).

In these cases, the climatic criteria only explain 7% of the allocation choices. For Edhec experts, strategies based on such clues should not be allowed to claim to be climate-friendly. Another element of concern: the study reveals that the composition of these indices does not evolve in a coherent way over time according to their climate objective.

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