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ESG Funds With $5 Trillion in Assets Boost Exposure to Oil and Gas

Funds promoting ESG goals – the world’s biggest class of ESG funds with an estimated $5 trillion in assets – have raised their exposure to the oil and gas industry over the past two and a half years, according to data from Morningstar cited by Bloomberg.

The EU introduced the so-called Sustainable Finance Disclosure Regulation (SFDR) in 2021, in which it defines Article 8 products as those that promote environmental or social characteristics and which integrate sustainability into the investment process.    

Article 8 funds are estimated to have around $5 trillion in client assets, per Morningstar data quoted by Bloomberg.

These so-called Article 8 funds, registered as “promoting” ESG goals, had 2.3% of their portfolios in oil and gas assets at the end of the third quarter of 2023, compared to just 1.4% when the EU introduced the SFDR investing framework two and a half years ago, the data from Morningstar showed. The same funds lowered their holdings in renewable energy assets to 0.3% of all holdings compared to 0.4% in early 2021.

In the Q3 2023 review of SFDR Article 8 and Article 9 funds, Morningstar said that “Amid persistent macroeconomic pressures, including high interest rates and slowdown in some of the largest economies, investors continued to pull money from Article 8 funds as these registered outflows of EUR 20.5 billion in the third quarter of 2023.”

At the same time, inflows into Article 9 products – those funds that have sustainable investment as their objective – slipped “to the lowest level of subscriptions for Article 9 funds since the introduction of SFDR,” Morningstar said.

In October, data from Morningstar showed that over the past year, investors have withdrawn a total of $14.2 billion from U.S. sustainable funds.

“Although the motivations behind outflows cannot be perfectly quantified, many factors are in play. These include rising energy prices, high interest rates, concerns about greenwashing, and political backlash,” Alyssa Stankiewicz, an associate director of sustainability research for Morningstar, wrote in an analysis.  

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By Tsvetana Paraskova for Oilprice.com

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