These holdings, while arguably inconsistent with the funds’ stated objectives, are often permissible under their own investment criteria, which may not exclude conventional oil and gas production. The use of broad ESG rating methodologies that emphasise relative sector performance could also be a driver of fossil fuel bond exposures.
We further explore how this exposure to oil major bonds relates to fund performance. Across a sample of funds benchmarked to the same indices, we find that higher allocations to fossil fuel issuances are generally associated with higher risk and/or lower returns. This suggests that divesting from the sector may not disadvantage investors financially, and could reduce exposure to climate transition risks that are not fully captured in traditional credit assessments.
Our analysis encompasses funds managed by BlackRock, Schroders, and Carmignac, unpacking the different methodologies used to screen investments for their sustainable products and identifying potential weaknesses in how ESG and climate labelled investments are constructed.
