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The legal holes in sustainable finance: this is how the money from the greenest investment funds ends up in polluting companies


Thousands of financial instruments across Europe aim to improve the environment. But unclear regulations allow almost half to have companies dedicated to exploiting fossil fuels in their portfolio, where they invest more than 8,000 million euros

One of the most environmentally sustainable European investment funds, owned by the American asset manager Blackrock, dedicates more than 300 million euros to one of the most polluting companies on the Old Continent, the German RWE.

Another financial vehicle with the same green label, from the Swiss entity Pictet, has transferred more than 200 million to the main electricity producer in the United States.

A fund also classified as green, from the French company Carmignac, invests 1.6 million euros in Ryanair, the European airline that emitted the most tons of CO2 in 2019.

The green


is guaranteed by the regulation that the European Commission launched to feed sustainable investments with the planet, an expanding sector that tries to care more and more for the impact of money.

But unclear regulations have led many funds to back down and others to take advantage of legal loopholes to move millions of euros to polluting sectors.

At least half (46.3%) of the most sustainable European funds, known as

dark green


Article 9

, have in their portfolio companies that exploit fossil fuels, the main causes of global warming and climate change.

After analyzing 130,000 investments from 838 funds, the journalistic investigative project

The Great Green Investment Investigation

, coordinated by Follow The Money and Investico and in which EL PAÍS participates along with ten other media, reveals that more than 8,500 million euros in Investments in polluting companies come from the greenest funds in Europe.

Spanish investors can access nearly 500 of these Article 9 funds and, in line with the data for the continent, half also invest in polluting companies.

70 funds distribute at least 645 million euros among five of the companies that emit the most tons of C02 in Europe: Enel (31 funds), Total (15 funds), Engie (12 funds), RWE (7 funds) and ENI (5 money).

Six funds from large managers, such as Principal Global, Pictet or Blackrock, dedicate more than 10% of their investments to polluting companies, enough to move more than a billion euros towards that sector that is most damaging to the planet.

The normal thing is that, on average, 3% of the portfolio of these funds goes to fossil fuel companies, without the rest going to companies with a clear environmental impact.

Among the companies that receive the most money from the Article 9 funds are the automobile company Toyota (2.8 million in investments), the pharmaceutical companies Thermo Fisher and Novo Nordisk (2.1 and 1.1 million), Microsoft (1.9), Sony (1.1) or L'Oreal.

The big managers, from Pictet to Principal Global, say that if they had to focus only on companies with no impact on the planet, they would only have a handful of companies at their disposal.

And that, according to regulations, they invest in fossil fuel companies only when they are showing a shift towards renewable energy or are not overly reliant on coal.

windfall winners

How can

financial instruments that inject capital into fossil fuels be

green ?

This is the question that the media that have collaborated in this investigation have asked dozens of fund managers, analysts and financial institutions.

The answer lies in a European standard that most of them define "weak" and "indefinite".

The European regulation (Sustainable Finance Disclosure Regulation or SFDR) requires that from March 2021 each fund be presented to investors with a label that clarifies how sustainable it is.

There are three levels:

Article 9


dark green

, with a goal of sustainable investments;

Article 8


light green

, which simply promotes environmental features;


Article 6



that does not have sustainability criteria.

The two most sustainable categories accumulate 4.3 trillion euros in investments (60 times what Alphabet, Google's parent company, bills in one year) and the dark green have doubled in one year.

In 2022, in the midst of the bad economic outlook, Article 9 are the most attractive: they have grown by 31,000 million euros while funds 6 and 8 lost tens of millions, according to the European Association of Funds and Managers (EFAMA).

The regulation came to bring order to sustainable finance, which already had great appeal.

As Alfredo Echevarría, from the Spanish Institute of Financial Analysts (IAF), recalls, with Article 9 “a product clearly differentiated from traditional funds is created, facilitating the decision of the saver who is looking for sustainable investment products.

The nature of a sustainable fund or not is no longer purely nominal ("I'm green because I say so"), but rather depends on compliance with a regulatory requirement".

Being an Article 9 fund requires not generating "significant damage" and that the investments are sustainable, according to European regulations.

The problem is that it is not clear how to measure that damage or what it is or how to identify the real sustainability of an investment.

This lack of a clear framework raised doubts after its approval, as Carlos Magán, partner at Analista Financieros Internacionales, recalls: “At that time, some managers transferred their entire range of products to Article 8 or 9.-It was difficult to understand how it was possible, but it was because there was confusion about what type of investments could be made or not”.

Sources from the legal department of Inverco, the association that incorporates collective investment institutions in Spain, agree that there are still doubts to be clarified in the standard about the very concept of sustainable investment: "We are witnessing accelerated regulatory processes, which are being on the fly: it is not normal ”, they explain.

In fact, “there is no solid legislative matter to know if 100% of the investments of an Article 9 fund have to be sustainable.

They are the ones with the greatest ambition in terms of sustainability, and they should be almost 100% sustainable, but it is an open question”, they add.

The European supervisor, the European Securities and Markets Authority, says that "there is no explicit prohibition to make investments in fossil fuels" but "it should be quite difficult to do so, due to the need to demonstrate that such investment does not cause any kind of environmental or social damage.

But it is something that in Europe has left the door open to different interpretations with an unexpected winner: the fossil fuel companies that have managed to raise money designed for sustainable companies.

The deputy director of the French authority for financial products (AMF), Philippe Sourlas, believes that "there is a large margin of interpretation, the text is not precise enough to draw conclusions."

Hugo Gallagher, from Eurosif, an association that promotes sustainable finance in Europe, agrees that some fundamental concepts of article 9 are not sufficiently developed and that the objectives of the regulation are not clear.

And, he adds, this has direct consequences: "At least 25% of Article 9 funds should be reclassified as 8 because they do not meet the condition that all investments are sustainable," he estimates.

In Spain, CNMV sources detail that non-sustainable investments could be admitted in Article 9, although "they must comply with minimum environmental or social safeguards, that is, investments for specific purposes must be in line with the objective of sustainable investment and comply with the principle of “absence of significant harm”.

The CNMV, in fact, is carrying out an analysis of the consistency of the information provided by these funds.

Fear of 'eco-laundering'

The consequences of this legal instability are already being seen in the European market.

Last week, Amundi, the largest fund manager in Europe, announced the declassification of 100 funds with more than 45,000 million in assets: they were Article 9 but have been moved to Article 8. In recent days and as confirmed Before the questions for this investigation, both BlackRock and RobecoSAM or BNP Paribas have indicated that they are acting in the same line.

In addition to these, the Morningstar analytics platform has identified at least 43 other funds that have turned from dark green to light green since June of this year.

If money flows into funds that don't keep their promises, there is a chance that prices will inflate.

The retail investor can fall victim to this

The first losers may be the investors, as the Association of European Investors, through its spokesman Joost Schmets, comments on learning of the results of this journalistic investigation: "It is reprehensible if, without being completely sustainable, a fund uses a green label dark to raise billions.

Article 9 is not a marketing tool, it is a promise to the investor”.

And they go further: “If money flows into funds that do not keep their promises, there is a possibility that prices will inflate.

The retail investor can be a victim of this.”

An alarm bell for the sustainable finance sector came a little over a year ago.

The SEC, the authority that monitors the financial markets of the United States, intervened in the offices of DWS, the fund manager of the German bank Deutsche Bank, for selling funds that were not ethical or green.

DWS's CEO was forced to step down and the bank began an internal investigation process.

The practice of selling products that are friendly to the environment when they are not, known as eco-




in English


, is a shadow that has hung over the sector since its birth.

The SFDR regulation was precisely a tool to avoid it - setting limits and legal frameworks - but it is not clear to what extent it has achieved it.

As Mario Latorre, professor of Economics and Finance, analyzes, "eco-


[among the funds of Article 9] it even happens in an involuntary way, as part of the attempts to match a product with what the legislator requests”.

In fact, he assures, many Article 9 funds are not "in a pure way": they modulate their choices based on risk and profitability: "Perhaps they exclude controversial sectors (weapons, tobacco, pollutants), but with some caveat, not including for example, only those with a high turnover: all this, so as not to have a significant impact on profitability”.

The Spanish managers of the private bank Pictet offer, in their responses to this newspaper, an example of how 'purity' is lacking and polluting companies slip into the greenest funds: their Article 9 Pictet Clean Energy fund “does not invest only in purely renewable companies , but also in those that are investing significantly in renewables" and seeks "a positive environmental and social impact by investing in companies that show at least 33% exposure to change towards companies related to renewable energies, technologies that reduce CO2 emissions or consumption of energy in the industry”, they explain.

Many fund managers questioned for this report believe that if they were strict and included only climate-friendly companies, they could pick less than 5% of companies globally.

According to Latorre, this occurs because “the attention needs to be shifted from the demands of the offer (risk and profitability) towards the need for impact, towards intentionally seeking impact.

If it is not done, 'sustainable finance' is going to remain on a label”.

What is missing to go in that direction?

According to Alfredo Echevarría, from the IAF, the problem resides in the impossibility of accurately measuring the objectives of each fund: “the 'elephant in the room' is that there is no data available to the market that allows for the effective development of these funds.

In our opinion, all the development of sustainable products pivots on the availability of data, which will allow the design of sustainable products with specific and measurable objectives”.

As of January 2023, a new phase of the European regulation will come into force, which will require answering a series of detailed questions to measure the real impact of each sustainable investment.

According to industry sources, it is the inability to offer so much detail to investors that is causing big managers like Amundi to lower the sustainability level of their products.

Although, as INVERCO points out, "if until now a fund was labeled as truly sustainable, it should have no problem explaining in detail why it is."

At least in theory.

Investigation methodology

How have the funds and their investments been identified?

The data of this investigation is updated to June 2022. Morningstar, one of the most important providers of data and financial services, has provided the media that have collaborated in this investigation with a list of all Article 9 funds available in each European country. .

Each fund has a unique identifier, the ISIN code, which has been used to track the entire portfolio of each fund in Bloomberg: in this way, the details of 838 funds of the 1,138 identified by Morningstar were found, for a total of 130,766 investments.

How have polluting investments been identified?

To label investments in fossil fuels, data from The Global Coal Exit List and The Global Oil & Gas Exit List, prepared by the non-governmental organization Urgenwald and used by more than 600 financial institutions around the world, have been used. 

Thanks to information from Bloomberg, it has been possible to quantify the percentage of investments that each fund dedicates to fossil fuels or aviation companies.

You can consult all the results of the investigation on the website of The Great Green Investment Investigation.

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Source: elparis

All business articles on 2022-11-29

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