Climate funds growing alongside global temps

Investment funds that target climate-related risks and opportunities are thriving with investors. But are they saving us from climate catastrophe? Not so much, according to new research from Morningstar.

The company reported that assets in open-end and exchange-traded funds with a climate focus have risen by 30% in the past 18 months to US$534 billion, thanks to a combination of net sales and new product launches.

There are now over 1,400 funds in the space worldwide, up from fewer than 200 funds in 2018, it noted.

Despite this outsized growth and soaring investor interest, however, the funds’ most popular holdings are not on track to curb global warming in line with global policymakers’ targets set out in the Paris Agreement.

“The growth of climate-related funds over the past five years is simply remarkable and reflects the growing awareness of the investment risks and opportunities arising from climate change,” said Hortense Bioy, global director of sustainability research, in a release.

“Our analysis of these funds reveals a gloomy reality, though. None are aligned with the goal of limiting global warming to 1.5 degrees Celsius,” she said.

According to the report, the world has already warmed by at least 1.1°C since pre-industrial times. And 87% of the world’s 5,000-plus largest public companies are on a pathway to at least 2.1°C in warming.

“We’re not saying climate funds are greenwashing. The fact is that they’re investing in a tiny pool of companies and countries on track or close to being on track to achieve net zero emissions by 2050,” said Bioy.

The report also noted that Europe dominates that climate fund landscape, accounting for 84% of global assets, followed by China and the U.S., with market shares of 8% and 6%, respectively. Australia and Canada rounded out the top five.

Looking ahead, Morningstar said it expects the climate fund product lineup to continue expanding.

“As more asset managers start implementing their decarbonization plans, we expect to see more new climate funds come to market. We will also see more existing conventional and sustainable funds repurposed into fully fledged climate funds or tweak their investment objectives to include emission reduction targets,” it said.

Additionally, as companies are required to disclose more useful climate data, investment funds will become more focused and accountable to investors, it suggested.

“More choices and better information on the carbon characteristics and physical risk exposures of their investments will help investors meet their climate goals,” it said.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.