ESG-labelled exchange-traded funds (ETFs) can carry a higher exposure to deforestation-risk issuers of corporate bonds than non-ESG benchmarks, according to a new study. The Anthropocene Fixed Income Institute (AFII), which analysed the exposure of leading corporate bond ETFs to issuers substantially exposed to deforestation, said the issue may be caused by the underlying ESG indices used to inform the funds’ allocations relying on broad-based ESG ratings that “gloss over” deforestation risks. ESG ETFs have on average 5.8% exposure to issuers in AFII’s Deforestation Debt Universe, with a majority having higher exposure than a non-ESG equivalent passive ETF. ESG index construction rules do not typically include deforestation concerns, the AFII noted, often relying on limited business exclusions and ESG ratings. For the higher risk issuers, ESG ratings, which reflect a broad assessment of the issuer’s ESG performance, can be high, which can lead to substantial exposure, it added. While some fund exposure levels could be attributed to use of particular benchmarks, AFII noted that elsewhere “exposure variations do not seem to follow a discernible pattern”. For example, the State Street USD fund (SPPU) was found to have the highest overall exposure (7.2%), but its EUR fund (SSGABP) had the second lowest (6.2%). Poorer scoring ETFs had a higher exposure to the eight issuers with the highest maximum deforestation exposure, which included Johnson & Johnson, Mondelez International and General Mills. “Investors with issuer-specific deforestation concerns may need to check their ETF choices are aligned with their investment intentions, and it may be new index construction methods need to be developed,” the AFII said.
Sustainable Investor
News in Brief
Firms that derive more of their revenue from products or services delivering positive impact tend to generate stronger financial performance, according to research from UK-based asset manager Schroders. The analysis of 257 firms – conducted in partnership with Oxford University’s Saïd Business School – demonstrated that impact investing can be a driver of alpha across listed equities under the right conditions, the company said. The research assessed whether firms outperformed traditional benchmarks using asset pricing models and regression analysis. Key financial drivers were controlled – size, value, momentum, profitability, and investment factors – to determine if impact firms generated alpha independent of risk characteristics. The data collection, financial modelling and back-testing was run independently by the Saïd Business School to ensure methodological independence and rigour. As well as showing that companies with higher revenue alignment to measurable impact themes generated superior financial returns, the analysis also demonstrated that impact portfolios delivered strong absolute and risk-adjusted returns, exhibiting statistically significant alpha unexplained by traditional risk factors. Impact portfolios also exhibited lower volatility, reduced drawdowns, and milder negative skewness compared to conventional indices, suggesting stronger downside protection. In addition, they showed stronger correlation with the market in economic expansions and weaker correlation in recessions, indicating asymmetric market exposure and stability. “Active investment via a robust impact measurement and monitoring framework remains key. For investors that get this right, aligning financial strength and impact could not just deliver positive purpose outcomes, but an investment return edge as well,” said Maria Teresa Zappia, Global Head of Impact at Schroders.
An upcoming review of EU disclosure rules is an opportunity to stem outflows from sustainable funds, according to the European Fund and Asset Management Association (EFAMA). EFAMA’s latest Market Insights report found that funds categorised as Article 9 under the Sustainable Finance Disclosure Regulation (SFDR) saw a steady decline in net assets during 2024. Article 9 fund net assets amounted to €353 billion at the end of 2024, or about 2% of the European fund market, declining by 3.3% compared to the end of 2023. EFAMA primarily attributed this to the relatively high share of actively managed equity vehicles among Article 9 funds which saw a general sell-off over recent quarters as investors shifted to exchange-traded funds (ETFs). The net assets of Article 8 funds have remained broadly stable at 51% of the European fund market in 2024, the report added. In light of this, EFAMA has called for the upcoming SFDR review to focus on increasing transparency and accessibility for retail investors, aligning with the rest of the EU’s sustainable finance framework – particularly the Corporate Sustainability Reporting Directive – and ensuring thorough market impact analysis. “Recent outflows from Article 9 funds, which are funds with an explicit sustainability objective, may indicate changing sustainability preferences, but are more likely a reflection of investors’ strong preference for ETFs,” said Thomas Tilley, EFAMA’s Senior Economist. “They underscore that the upcoming review of the SFDR framework is timely if we want to ensure sustained financing for the transition to a green economy.”
ImpactA, a women-led emerging markets (EM) infrastructure debt investor, has raised over US$200 million in public and private capital commitments to tackle the critical infrastructure deficit in EMs. Existing investor Legal and General (L&G) committed up to US$100 million to the firm in October 2023 and is now joined by new commitments from UK government programme MOBILIST, the private sector arm of the Inter-American Development Bank Group, IDB Invest and other private investors. “Channelling capital into private debt financing for EMs is crucial to closing the US$4 trillion annual funding gap and achieve the UN Sustainable Development Goals,” said Hannah Gore-Randall. “We believe this investment shortfall also offers investors the opportunity to benefit from the potential for strong returns and diversification to their portfolios that exposure to EMs can provide.” The funds raised will be deployed to provide catalytic financing for sustainable infrastructure in EMs, with a particular focus on mitigating climate challenges and reducing social inequalities across clean and renewable energy, sustainable mobility, health, water, and sanitation. “We are thrilled with the support and collaboration, from both public and private institutions for this important initiative,” said Isabella da Costa Mendes, ImpactA’s Co-founder and Co-CEO. “Through such collaborations, we are providing global investors the confidence to diversify their allocations.”
Investors in Asia are accelerating action on climate, with 34% having committed capital towards related solutions, clean energy and transition finance, according to research from the Asia Investor Group on Climate Change (AIGCC). The group’s sixth annual ‘State of Investor Climate Transition in Asia’ report gleaned data from 230 of the region’s largest and most significant asset owners and managers, collectively representing more than US$100 trillion in AUM. AIGCC said there is a “clear trend” of investors allocating capital and growing their exposures to green and transitioning assets set to benefit from the global net zero transition. The report noted that the adoption of climate transition plans is becoming mainstream, with 35% of investors having now published such plans – a 7% increase from the previous year. AIGCC acknowledged this rise could be attributed to current and future regulations requiring investors and companies to disclose their climate risks and their plans for addressing these risks. Deforestation policies and strategies also increased by 9% year-on-year, albeit from a low base, with 21% of investors having taken deforestation-related action, such as by adopting a general stance on deforestation or a more detailed strategy. Asset owners were found to be “generally slower” in developing deforestation-related strategies compared to asset managers. “With our most comprehensive analysis to date of Asia’s most influential investors, the direction of travel is crystal clear: US$100 trillion of investor capital in Asia is ratcheting up their climate action plans and are looking for opportunities to invest,” said Rebecca Mikula-Wright, CEO of the AIGCC. “However, with markets in Asia highly exposed to physical climate risks and nature-related risks, we need to see more investor ambition in accounting for these risks in their portfolios as well as allocating capital to address them.”
Sustainability tech company Clarity AI has announced that German boutique asset manager CHOM Capital will be using its data and analytics platform to support its compliance with EU disclosure rules. The two funds in question are designated as Article 8 under the EU’s Sustainable Finance Disclosure Regulation (SFDR). This collaboration will provide CHOM Capital with access to Clarity AI’s screening capabilities, supporting adherence to Paris-Aligned Benchmarks and streamlined reporting through the European ESG Template. Clarity AI will also support CHOM Capital’s application for the FNG label, a sustainability certification for financial products in German-speaking countries. The support will include both negative screening and positive sustainability criteria, such as alignment with the UN´s Sustainable Development Goals. “Sustainability data is a crucial part of our holistic investment process,” said Benedikt Kirsch, CHOM Capital’s Head of Sustainability. “Gaining a deep understanding of business models, value chains and their impact on environment and society across the life cycle requires industry-leading data coverage and quality, as well as full raw data transparency.” Philipp Kuschbert, Lead for Germany, Austria and Switzerland at Clarity AI, added: “Navigating sustainability regulations can be complex, requiring asset managers to align with evolving standards while maintaining transparency and credibility. We are proud to support CHOM Capital in this process by providing comprehensive, data-driven solutions that simplify compliance, streamline alignment with SFDR requirements, and ensure their funds meet the highest sustainability standards efficiently and effectively.”
A new rating provided by data and technology solutions provider ISS STOXX will help investors better assess the impact and risk of green, social and sustainability bonds. This will cover bonds issued by both corporate and sovereign entities. “The volume and complexity of labelled bond issuances has increased significantly in recent years, against a backdrop of disparate regulatory and market reporting standards,” said Till Jung, Head of ESG at ISS STOXX. He added that this “differentiated offering” means that investors will be able to better compare the material sustainability risks and opportunities of labelled bonds from the moment that they are issued. “This is significant as it is not just building an assessment based purely on general elements from the issuer’s activities and performance,” said Jung. The new rating supports a wide range of investor use cases, from risk management reviews through to helping investors meet their reporting obligations. The assessment is aligned with international standards and guidelines on labelled bonds, such as those issued by the International Capital Market Association and the UN Sustainable Development Goals.
Deutsche Bank’s asset manager DWS has been fined €25 million (US$27.6 million) by German prosecutors for misleading investors about its green credentials. This follows long-running investigations by authorities in both the US and Germany, as well as a US$19 million settlement with US authorities back in 2023. German prosecutors have concluded that the asset manager aggressively advertised its green credentials. The investigation was formally launched after a complaint lodged by whistleblower Desiree Fixler – the firm’s former head of ESG – which claimed that DWS had made misleading statements on the size of its ESG assets in its 2020 annual report. A separate investigation into DWS’ conduct at this time by German financial watchdog BaFin is still ongoing.
The UK government is planning to make major reforms to environmental regulation to make its approach more “dynamic [and] streamlined”. This will drive economic growth and safeguard nature under its Plan for Change, the government said. The decision is prompted by a new review commissioned by the UK’s Environment Secretary Steve Reed, which found that the current environmental regulation system is “outdated, inconsistent and highly complex – delivering for neither nature nor growth”. While the report urged avoiding a “bonfire of regulations”, it made 29 recommendations to streamline rules, all of which are under active consideration by the government. The review found that the Department for Environment Food and Rural Affairs has 34 agencies and public bodies and more than 3,500 legislative items in force, illustrating the need for streamlining. The government plans to fast track nine key measures seen as having the greatest impact for growth and nature recovery. This includes establishing a single, lead regulator for major infrastructure projects, revamping environmental guidance, streamlining permits and guidance, and boosting green finance through a new industry-funded Nature Market Accelerator. “Our current system for environmental regulation lets down both nature and growth; we must focus on good outcomes and nature enhancement, not on rigidly preserving everything at any cost. “This review clearly shows that simply scrapping regulations isn’t the answer – instead, we need modern, streamlined regulation that is easier for everyone to use,” said Dan Corry, the economist who led the review. “While short-term trade-offs may be needed, these reforms will ultimately deliver a win-win for both nature and economic growth in the longer run. Planning reforms and a new Nature Restoration Fund will unlock much needed housing delivery and infrastructure whilst supporting nature recovery at scale.”
The world’s largest pension fund has reaffirmed its commitment to ESG principles with the publication of a new sustainability investment policy. As part of this new policy, Japan’s Goverment Pension Investment Fund (GPIF), which has US$1.7 trillion AUM, said that a “reduction of sustainability-related risks and improvement of sustainability of markets” can only be realized when investee companies and other stakeholders of capital markets understand the significance of sustainability and reflect it in their daily business activities. “We therefore believe that information disclosure on sustainability is an important means of engagement for GPIF,” said the asset owner. “Based on this view, we will proactively disclose information targeting investee companies and other stakeholders of capital markets, not to mention insureds.” GPIF added that it will be investing in staff and data management systems that are needed to manage the “highly diverse and often unstructured information” requiredfor sustainability investment.
