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Asset managers continue to fund fossil fuel expansion

Despite their sustainability claims, think-tank Reclaim Finance finds that asset managers have invested $3.5bn in fossil fuel bonds.

By Adrian Murdoch

fossil fuel bonds, asset managers, ESG
Heart of the problem. Fossil fuel debt is still popular with asset managers. (Image by The Light Lab via Shutterstock)
  • The top 30 asset managers have invested $3.5bn in bonds of 40 companies involved in fossil fuel expansion over the past 18 months.
  • As of January this year, BlackRock and Vanguard alone held $25.3bn in oil and gas bonds.
  • Ostrum AM is the only asset manager to publish clear expectations that companies should stop their oil and gas upstream expansion plans.

It is a theme to which Capital Monitor keeps returning: the inability of asset managers to give up investments in oil and gas despite their protestations of sustainability. While attention has generally been on the way that asset managers support the fossil fuel giants in the equity markets, in a report published in late June, Paris-based think tank Reclaim Finance looked at bonds.

It found that the 30 asset managers have invested $3.5bn in bonds issued over the last 18 months by some 40 companies actively involved in fossil fuel expansion.

“Asset managers continue to add fuel to the fire by buying the bonds from the worst fossil fuel polluters,” says Lara Cuvelier, sustainable investment campaigner at Reclaim Finance. “Their policies are an inadequate response to the climate emergency.”

The report looked at 30 asset managers – the 25 largest in Europe and the five largest in the US – with €37.5trn ($41trn) in assets under management as of the end of last year. It found that they held $597bn in bonds and shares in the biggest fossil fuel developers as of January this year [see chart].

It is unsurprising that BlackRock and Vanguard, the world’s two largest asset managers ($8.6trn and $7.2trn AUM respectively) have the highest level of investments in fossil fuel bonds. Between them, they hold $25.3bn in oil and gas bonds.

“Asset managers have enormous power through their bond purchases and it’s time to ask them to flex their muscles and stop this flow of money to fossil fuel developers,” says Cuvelier.

Notably opaque

The bond market has had less attention than the equity markets – Reclaim Finance says this is because “bond markets are notably opaque”.

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To highlight this, the report uses Adani Group, the world’s largest private developer of fossil fuels, as a case study. The group is involved in 12 GW of new coal power plants in India and in eight coal mining expansion plans.

“Investments in the Adani Group are incompatible with the net-zero commitments taken by the vast majority of the asset managers,” it concludes.

The 30 asset managers currently hold $2.5bn bonds in the Adani entities, led by BlackRock, Vanguard and State Street Global Advisors which between them hold $2bn in Adani bonds and shares.

They are also noticeably passive in their holdings. Only three asset managers – DWS, Amundi and LGIM – voted against the re-election of Rajesh Adani as director of Adani Enterprises, while DWS alone voted against the allocation of dividends.

At the beginning of June, the Toxic Bonds initiative collected evidence that confirms that funding into Adani Green Energy is being redirected, through collateralisation and related party transactions, to other Adani Group entities directly responsible for coal expansion projects.

“Any so-called green investment in Adani Green directly supports the wider Adani Group to be the world’s largest private coal mine and coal power plant developer,” says Tim Buckley, director of Australian-based independent think tank Climate Energy Finance.

Fossil bonds: dawning realisation

For all the bad news, some flickers of light are dawning on asset managers that sustainability means more than a picture of a waterfall or a pair of hands cupping a plant on their corporate website.

The standard defence of many of the asset managers is to claim that they run passive funds – one that sells investment products based on exposure to third-party indices – abrogating them of responsibility for such emissions. Vanguard told Capital Monitor as much last year.

But Aviva Investors ($453.4bn AUM) has excluded thermal coal, arctic oil and oil sands from the majority of its funds and has put them in the same categories as tobacco and weapons.

The only exceptions, it explains in its ESG Baseline Exclusions Policy, are “companies that have an approved science-based target for climate change, which has a classification of warming well below 2°C”.

It’s a start, at least. Only one asset manager reviewed by Reclaim Finance, Ostrum AM ($424bn AUM) has published a clear expectation that companies should stop their oil and gas upstream expansion plans and states that this expectation can lead to defined sanctions.

In 2021, the manager excluded any development of new coal capacity and firms that had not defined a coal exit plan in accordance with the Paris Agreement. Last year, it said that it would no longer conduct any fresh investments in companies that derive more than 10% of production in oil and gas exploration and production operations.

In an essay in late June, it made clear that these policies were rooted in risk management.

“It’s a safe bet that negative externalities will be accounted for in the years to come, to put a value on the destruction wrought on the climate and nature. This would change the profitability and financial profile of many industries and sectors,” wrote Nathalie Pistre, Ostrum’s head of research and sustainable, responsible and impact investing.

Ostrum’s approach may not be perfect – Reclaim Finance complained about the firm’s weak escalation process and the fact that sanctions are not applied in a systematic manner – but there is at least growing recognition that ESG should be seen as a risk management tool. And unless they recognise this soon, leading asset managers will find themselves overtaken by smarter rivals.

[Read more: Oil majors are burying sustainability like it’s out of fashion]

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