Fossil lending

Fossil bond holdings in sustainable funds

Written by Josephine Richardson

Download full paper (0.3mb)

AFII’s latest analysis finds that a universe of so-called sustainable funds invests in over $7.3bn of oil major bonds.

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.

About the author

Josephine Richardson

Josephine Richardson

Managing Director, Head of Research

Based in London, Jo leads AFII’s research and a global team supporting fixed income investors as they align their portfolios with climate and sustainability goals. She joined AFII after 18 years in fixed income markets at JPMorgan.

Before you sign up

By completing this form, you agree to AFII sharing information that we think you may be interested in, including our insights on climate transition. See our Data Protection Policy for more information about how we collect and use your personal data, and any rights you may have in relation to your personal data. You may opt out from our distribution list at any time.