ESG fund manager uses carbon-heavy bets to beat pack
This year’s best-performing ESG fund managers have relied heavily on some of the most carbon-intensive assets, ostensibly in keeping with regulations intended to steer capital toward a greener future.
The top-ranked ESG equity fund in the year through mid-June, which is managed by Eurizon Asset Management, gained almost 16%, compared with the average 20% decline for its European peers.
The fund manager behind the stellar performance, Francesco Sedati, readily admits that the contents of his portfolio -- fossil fuels and other commodities -- “are a bit controversial from an ESG point of view.” But he also points out that his fund complies fully with the EU’s Sustainable Finance Disclosure Regulation’s so-called Article 8 classification, which is reserved for investments that “promote” sustainability.
It’s a good illustration of the way in which Europe’s landmark anti-greenwashing rulebook is opening itself up to a wave of criticism from investors, activists, lawyers and even regulators for being too vague and potentially even toothless. The Eurizon fund in question is overseen by the Luxembourg regulator. But across the border in France, the financial watchdog has questioned the inclusion of fossil fuels in ESG funds.
Article 8 fund managers need to come up with “serious” justifications for choosing fossil fuels, according to Robert Ophele, the head of the French supervisory authority. But when it comes to SFDR’s stricter ESG category, known as Article 9, “it is out of the question” to hold such assets, he said.
The European Sustainable Investment Forum recently warned that if weaknesses in SFDR aren’t addressed, the ESG fund management industry it’s intended to guide will face “significant reputational risk.” It estimates that at the end of 2021, 39% of Article 8 products and 33% of Article 9 products had more than 5% exposure to fossil-fuel companies. What’s more, 22% of Article 9 funds were exposed to firms that get over 5% of their revenue from thermal coal. For Article 8 products, the figure is 36%. Eurosif characterizes the findings as “surprising.”
Sonali Siriwardena, partner and head of ESG at law firm Simmons & Simmons, is warning clients that the coming year will bring with it significant upheaval to the wider regulatory environment.
“It’s going to be a roller-coaster ride over the next 12 months,” she said.
The bottom line remains that time is running out to ensure that the world’s most ambitious ESG investing regulations are fit for purpose.
In April, the United Nation’s Intergovernmental Panel on Climate Change estimated that the planet might be on track for temperature increases that could be twice the limit set out in the Paris climate accord. The question is whether the world can rely on the fund management industry, and those regulating it, to ensure capital moves into projects that prevent that from happening.