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Analysis: the SFDR funds exposed to gas and nuclear

The number of funds under the Sustainable Finance Disclosure Regulation with exposure to natural gas and nuclear investments has been falling. But it could well now rise after the EU classified the two fuels as sustainable transition activities under its new taxonomy.

By Elizabeth Meager

sfdr gas nuclear
Questionable contents: some SFDR funds have major exposure to nuclear and gas. (Photo by vchal via iStock)
  • Investments in natural gas and nuclear make up less than 2% of funds designated light and dark green under the EU’s Sustainable Finance Disclosure Regulation (SFDR)… 
  • … but that proportion could well rise after Europe’s lawmakers voted to label gas and nuclear as sustainable transition investments. 
  • SFDR funds also hold considerable positions in companies that have lobbied hardest in support of gas and nuclear and in other firms seen to have a particularly negative impact on the environment. 

When the European Commission said in early February that it would label nuclear energy and natural gas as sustainable transition fuels in its new taxonomy, many warned that more money would subsequently flow into these activities. 

Including assets or activities in the taxonomy is essentially an EU lawmaker-stamped seal of approval, allowing fund managers to include such investments in their sustainable products as ‘taxonomy-aligned’. These products are accordingly labelled Article 8 (light green, or funds that promote environmental or social characteristics) or Article 9 (dark green, or funds with environmental or social characteristics as their objective) under the Sustainable Finance Disclosure Regulation (SFDR), which came into effect in March last year. 

The goal of both sets of rules was to stamp out greenwashing and reassure climate-conscious investors. But environmental campaigners – and indeed many investors, including the $57trn-backed Institutional Investors Group on Climate Change – argue that the inclusion of gas and nuclear goes against the spirit and objective of the taxonomy and the SFDR and could mislead investors and make it harder for them to honour their own pledges

SFDR funds’ gas and nuclear exposure

Capital Monitor crunched the numbers in research house Morningstar’s SFDR funds database as of 15 March and found minimal, but material, exposure to oil, gas and nuclear. In fact, the number of funds with exposure had been shrinking.  

Around 50% of all Article 8 or 9 funds have some form of investment in those activities, down from around 80% a year ago. The absolute value of investment is a far smaller proportion than that though (see chart below). SFDR-designated funds have $76bn invested in the three fuels, out of a total $4.5trn as of December 2021.  

It is not clear whether the value of exposure has also been shrinking. Given there are so many more SFDR funds today, it is entirely possible that the overall dollar exposure to gas and nuclear has risen. 

There are no minimum standards for what can be included in an SFDR fund, and some ESG-labelled funds are exposed to oil and gas. Campaign groups are urging EU lawmakers to develop criteria for SFDR funds for areas such as sustainability performance, engagement and stewardship, and exclusions. 

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While SFDR aims to make sustainable investment more transparent by requiring fund managers to specify whether a product contains transition activities, they are not required to disclose sectors included in the portfolio. As a result, investors seeking to invest in renewables could end up with gas and nuclear in their portfolios, the European Sustainable Investment Forum has said. Gas and nuclear power companies will also now be able to sell green bonds, which make up a considerable proportion of SFDR fund assets. 

“We don’t know yet which gas projects are going to be eligible, so probably quite a few of the gas assets currently included in SFDR funds will not be taxonomy aligned,” says Victor van Hoorn, executive director of the Brussels-based European Sustainable Investment Forum (Eurosif). “This is the transition debate playing out before us, which we know the SFDR has not, and maybe won’t be able to, settle.”

Exclusion policy U-turn coming?

In some cases, the inclusion of gas and nuclear in the taxonomy could trigger rowbacks of existing exclusion policies. As of February, 23% of investors in EU primary bond markets excluded oil and gas company issuers, 16% did the same for nuclear, and 40% did the same for coal. 

Some fund managers have said they will maintain such policies. But others are grateful they now have access to more assets that they can incorporate in products labelled as ESG or sustainable. 

Indeed some Article 8 funds are heavily exposed to oil and gas companies. French fund house Amundi has three of the ten products with the biggest such holdings (see table below). In one case – Amundi’s Etoile Energie Europe C – such stocks account for more than half (53%) of the portfolio’s value.

Meanwhile, Article 9 funds – defined as having carbon emissions reduction as their objective – tend to be more exposed to nuclear energy, which is seen by many as a viable carbon-free transition fuel (see table below). 

Whether or not end-investors know or care what is in the funds they are buying, maintaining – or raising – exposure to gas and nuclear would likely make it more difficult for asset managers to reduce their own portfolio emissions.  

After all, the International Energy Agency has said gas should not be viewed as a transition fuel. Asset managers with $57.5trn under management have committed to net-zero alignment by 2050 under the Net Zero Asset Managers initiative. Yet a European Commission-certified ‘sustainable’ label for gas is just that: a label. It does nothing to change the fuel’s emissions profile. 

In support of gas lobbyists

A further revelation of the Morningstar data is that SFDR funds – mostly Article 8, but in some cases Article 9 – hold positions in many companies that have played a big part in the huge lobbying effort to get gas included in the taxonomy.  

London-based think tank InfluenceMap has identified BP, Repsol, Shell and TotalEnergies as among the ten most active lobbyists on EU gas policy. All of these companies regularly appear in the top holdings of the funds listed above. 

“It’s not that surprising that thematic energy funds labelled Article 8 have these kinds of companies in them, but there would need to be a strong engagement strategy at least,” says Van Hoorn.

SFDR funds are questionable for more than just their exposure to European pro-fossil fuel lobbyists. 

For instance, the biggest holding in Swiss asset manager Swisscanto’s Responsible Global Energy Equity Fund is ExxonMobil. InfluenceMap identifies the latter as the corporation with the biggest negative influence on climate policy in the world, based on its intense resistance to government efforts to transition the US away from fossil fuels. 

Swisscanto’s second-biggest holding is ConocoPhillips (seventh most active in pro-fossil fuel lobbying globally), followed by Chevron (second most active) and Enbridge (21st most active). 

What’s more, some of the funds most exposed to oil and gas (see table below) still have considerable stakes in Russian state-owned groups Gazprom, Lukoil, Rosneft and Sberbank. 

It is a question of trying to engage the companies in question, according to Fabio Pellizzari, head of ESG strategy and business development at Zürcher Kantonalbank, parent company of the fund manager.  

The fund is subject to a 2°C Paris Agreement climate strategy, which it will achieve through voting and engagement, he says. Companies that continue to lobby against climate change and do not manage their greenhouse gas emissions will be partially and eventually fully divested from the portfolio, Pellizzari adds. 

“It is important that issuers that are key to the transition are part of the economy and the regulation,” he says. “For us it is crucial to remain invested and steer companies towards more sustainable practices via our stewardship, while keeping divestment as a possibility.” 

Such arguments are widely supported, a growing number are seeing divestment as an effective option for polluting assets.   

Nonetheless, when the taxonomy becomes effective in nine months’ time, it seems likely that Article 8 funds will have larger holdings of both gas and nuclear assets. And that seems unlikely to be purely because asset managers are growing keener to help such activities transition. 

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