Research: European ESG Funds Invested Over €123B in Fossil Fuels
Major oil companies, including TotalEnergies, Shell, ExxonMobil, Chevron, Eni, and BP are still expanding their fossil fuel projects with impunity.
Around two-thirds of ESG funds (9,420) are not under the jurisdiction of ESMA rules.
Experts suggest tweaking SFDR regulation; they do not have any fossil fuel exclusion rules to prevent greenwashing.
Greenwashing is prevalent in Europe, with over 4,792 environmental, social, and governance (ESG) funds invested in companies looking to expand their fossil fuel projects, according to new research by NGOs Urgewald and Facing Finance.
These funds, also called Article 8 and Article 9, are supposed to encourage sustainable investments. The research covered over 14,000 funds and stumbled upon their prolific misuse. More than 4,792 funds, with an investment of €123 billion, were used in fossil fuel development.
The research says that the companies are either expanding their fossil fuel projects or do not have a proper or well-organised plan to phase out coal pursuant to the Paris Agreement. The oil giants—TotalEnergies, Shell, ExxonMobil, Chevron, Eni, and BP—attracted €23.5 billion in investments, with TotalEnergies, the EU's largest oil and gas producer, alone accounting for €8.1 billion.
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Many funds claiming to be sustainable are continuing their support for oil and coal expansion. For example, Glencore, a coal company, has received billions in investments from some funds.
These instances of greenwashing go against the very fundamental idea of ESG or sustainable investing, subsequently misleading climate-conscious investors. We need crystal clear regulations with respect to ESG funds authentically supporting sustainability rather than classifying fossil fuel investments under the guise of green finance, say experts.
Julia Dubslaff, Finance Researcher at Urgewald, says: "Companies that pursue fossil fuel expansion projects in the midst of a climate crisis are jeopardizing our future. Their presence in ESG funds violates the very concept of sustainability.
"The presence of fossil fuel expansionists in over one-third of the funds that claim environmental or social traits misleads climate-conscious investors. The European legislator must set clear rules for all ESG funds and put an end to this travesty."
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Although new regulations introduced by the European Securities and Markets Authority (ESMA) clearly define stricter naming rules for ESG funds, they apply only to funds whose names include terms like "impact", "sustainable", or "Environment". To cap it all, around two-thirds of ESG funds (9,420) are not under the jurisdiction of these rules owing to them not using any of those terms mentioned.
Consequently, while 44% of funds might need to sell their fossil fuel investments or change their names by May 2025, the remaining 57% will continue their investments unsustainably—and that too, scot-free.
The research also points out how top firms are involved in fossil fuel financing despite managing ESG funds. JPMorgan Chase invested €10.2 billion across 105 funds, leading the list; Deutsche Bank’s subsidiary DWS with €8.7 billion in 178 funds; and BlackRock with €8.3 billion in 188 funds.
Frederike Potts, financial analyst at Facing Finance, explained: "Retail investors in particular can hardly see through the ESG jungle and often have no idea in what dirty companies they are investing their money. The ESMA guidelines at least provide a remedy for funds with sustainability and environmental terms.
"However, fossil fuel investments in other ESG funds must also be curbed. It is beyond reason why funds with the term 'transition' in their name are allowed to keep investments in companies that are slowing down the transformation of our energy systems and pursuing fossil fuel expansion projects. If these loopholes are not closed, it will be a missed opportunity for consumer protection in Europe."
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To curb this, the European Commission is mulling over a plan to review ESG funds strictly by late 2025, with a focus on the Sustainable Finance Disclosure Regulation (SFDR). Presently, SFDR does not have any fossil fuel exclusion rules; it only requires funds to disclose their investments.
Experts say it is high time we overhauled SDFR by introducing clear regulation in respect of fossil fuel exclusion to crack down on future greenwashing attempts, protect the rights and ambitions of investors who put their money into the genuine cause, and support the transition to sustainable energy.
Without strict regulations, greenwashing will be rife in Europe and erode the trust of responsible investors.
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Source: Urgewald and Facing Finance
