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April 29, 2022updated 03 May 2022 7:59am

Fossil fuels: Funds slow to ditch passive assets

Asset managers’ exclusion policies on coal, oil and gas remain weak, new research indicates. As a result, actively managed funds may be reducing exposure to such assets, but investment via passive strategies is still substantial – with certain telling exceptions.

By Vibeka Mair

Still mining new seams: The vast bulk of asset managers’ exposure to coal expansion projects is held via bonds. (Photo by andresr via iStock)
  • Most asset managers are reducing active equity investment in fossil fuels but maintaining substantial passive exposure, new research suggests, but there are apparent exceptions.
  • Legal & General Investment Management has minimal exposure to fossil fuels, while State Street Global Advisors has minimal exposure to coal, according to a new report from Reclaim Finance and other NGOs.
  • The report also lists the top three holders of bonds issued by fossil fuel developers as BlackRock, Allianz and Vanguard, in that order.

Asset managers’ investment holdings of and policies around fossil fuels seem distinctly at odds with their widely touted net-zero emission pledges and the pressure they are putting on portfolio companies to strengthen their climate plans. Even as their active equity allocations to coal, oil and natural gas development are falling, their passive investments are not – or at least not to the same degree. That leaves index-based allocations playing an increasingly major role in financing coal, oil and natural gas development, research by campaign groups shows.

New reports issued this month – one last week by a coalition of four non-governmental organisations (NGOs) and the other by UK think tank Common Wealth on 8 April – provide telling detail. The latter, for instance, finds that the fossil fuel industry is now the only sector in which passive allocations represent more than 40% of fund ownership as actively managed funds slowly reduce their investment in the industry.

Meanwhile, 30 asset managers – the 25 biggest headquartered in Europe and the five biggest in the US – are still substantially invested in fossil fuel expansion via their holdings of bonds and shares, shows the report from the NGOs Reclaim Finance, Re:Common, The Sunrise Project and Urgewald. The report distinguishes between fossil fuel producers and developers, the latter being those companies with plans to expand production.

The biggest fossil fuel bondholders

The 30 fund houses hold a combined $550.5bn in companies involved in fossil fuel expansion: $82.5bn in coal developers as of November last year and $468bn in oil and gas developers as of March this year, mostly held via equities. BlackRock ($10trn in AUM), Vanguard ($7.2trn) and State Street Global Advisors (SSGA, $4.1trn)) are far and away the top three, in that order.

Data from Reclaim Finance, shared exclusively with Capital Monitor, shows that BlackRock, Allianz Global Investors/Pimco (about $3trn combined) and Vanguard are the three asset managers with the biggest bond exposure to coal developers, based on data from Urgewald’s Global Coal Exit List (GCEL). For the oil and gas sector, it is Vanguard, BlackRock, Allianz Global Investors/Pimco, J.P. Morgan Asset Management and Amundi ($2trn) with the largest bond exposure.

Yet it also shows that SSGA – in the top three managers by exposure to oil and gas – does not appear in the top 15 for coal exposure via either bonds or equities. Meanwhile Legal & General Investment Management ($1.8trn) – like BlackRock, Vanguard and State Street Global Advisors, one of the biggest managers of passive funds – is well down the list for both coal and oil & gas, with comparatively minimal exposure to fossil fuels through any asset holdings. These findings suggest it is possible for even major index fund providers to implement robust exclusion policies, despite claims to the contrary from some quarters.

The NGOs’ report says bonds are a critical source of funding for companies seeking to expand their fossil fuel activities. Nearly all 503 coal developers in the GCEL have issued bonds to finance and develop their operations. And companies on Urgewald's Global Oil & Gas Exit List had some 9,000 bonds on the market in 2020, worth a total of $3.95trn.

“Given the growing importance of corporate bond issuance in companies’ fund-raising strategies, it is particularly important for investors to be held accountable when they buy newly issued bonds,” the report says.

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Exclusion policies remain weak

What’s more, not one of the 30 asset managers assessed in the report has a clear exclusion of companies with oil and gas expansion plans. Only one asset manager, Ostrum, part of French bank Groupe BPCE, has a policy that indirectly excludes companies with expansion plans accounting for at least 50% of all resources under development. Only two asset managers – Ostrum and fellow French firm Amundi – of the 30 are planning a complete phase-out of a subset of the oil and gas sector.

As for coal, 17 of the asset managers have coal exclusion policies but only seven exclude coal developers: Aegon, Amundi, Axa Investment Managers, BNP Paribas Asset Management, Generali Investments, M&G Investments and Natixis Investment Managers.

“Excluding companies with such plans is a priority, given that climate science is clear that there is no room for new fossil fuel projects in our carbon budget,” Lara Cuvelier, sustainable investments campaigner at Reclaim Finance, tells Capital Monitor. “Thus a robust coal policy combines several criteria and includes one on companies developing new coal projects.”

Only eight asset managers have committed to exit the coal sector by 2030 in EU and OECD countries and 2040 globally. And only two – again, Amundi and Ostrum – require coal companies to adopt phase-out plans by the same deadline.

Passive fossil fuel holdings still prolific

Ultimately, the report shows that asset managers’ fossil fuel investment polices are still largely failing to cover passive allocations – something that Capital Monitor research highlighted in September last year. Around €17trn of assets are managed passively by the 30 firms, and none apply their exclusion to all such assets.

Only one asset manager, BNP Paribas Asset Management, applies its fossil fuel policies to more than half of its passive portfolio (which accounts for 7% of its total €530bn in AUM), says the report. The French firm applies its coal exclusion policy to 70% of its open-ended passive investments and it says it is “having ongoing conversations with index providers on this topic", says Cuvelier. But BNP Paribas AM has not said publicly that its goal is to make 100% of all passive products coal-free.

While their restrictions are slightly stronger on coal than they are on oil and gas, only seven asset managers exclude coal developers: Aegon, Amundi, Axa Investment Managers, BNP Paribas AM, Generali Investments, M&G Investments and Natixis IM.

Germany’s DWS, which does not have a public coal exclusion policy, says it would only launch passive products without a coal filter if there were a specific reason for doing so, such as a mandate or clear client demand for a standard index or similar.

Rising scrutiny of index providers

Yet the spotlight has fallen on this segment of the market more starkly since the near-blanket divestment from Russian assets since Vladimir Putin’s invasion of Ukraine. Campaigners and investors note that providers of passive funds and indices can exclude assets if there is sufficient will to do so. It may take rather longer for fossil fuel exposure to fall in passive portfolios than in active ones, but that seems a logical progression.

Similarly, fossil fuel-related debt seems likely to gradually lose its attractiveness, in light of the looming disruption that activists groups like Scientist Rebellion warn is on the way as carbon emissions continue to rise.

How long that will take, though, is anyone’s guess.

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