Green saving is hard – despite sustainable funds
Interest in sustainable investment funds remains strong, despite the uncertainty in global trade policy. However, the investments in green funds often differ very little from conventional funds – according to a new study by IVL, KTH, Stockholm University and the Stockholm Resilience Centre.
We see in our analysis that the holdings in the vast majority of funds overlap significantly – regardless of whether they are classified as conventional or sustainable
, says IVL's data processing expert Axel Lavenius, who worked on the study.
To increase transparency and combat greenwashing, in 2021 the EU introduced the Sustainable Finance Disclosure Regulation (SFDR).
Axel Lavenius
According to the SFDR, funds are divided into three main categories – Articles 6, 8 and 9 – where Article 6 refers to conventional funds, Article 8 includes funds that promote environmental or social qualities, and Article 9 pertains to sustainable investments. All fund types must report on how sustainability risks are addressed, even if the fund's ambition is not to be sustainable.
However, the study shows that the difference between the various categories is normally very small.
Despite the EU's extensive regulations to ensure transparency, green funds are often remarkably similar to conventional funds
, says Mark Sanctuary, researcher at KTH and former employee at IVL.
So the SFDR primarily says something about how companies report sustainability, not about the actualy sustainability of the companies in the fund
, continues Axel Lavenius.
Just three per cent of the funds are sustainable
About half of all European equity funds are Article 8 funds, which means they often follow the market. In practice, many of these funds are made up of large, well-known companies. The most sustainable funds, Article 9, only make up about three per cent of all funds. They're somewhat different from other funds, and show more potential to deviate from the market portfolio.
According to the study, the most common way to build a green fund is to start with a broad, conventional portfolio and then exclude certain companies, usually those linked to fossil fuels, tobacco or arms. This so-called negative screening does not automatically steer capital towards truly sustainable or future-oriented companies.
Article 6 and 8 funds focus primarily on excluding the most unsustainable companies, rather than actively reallocating to companies in line with the climate transition
, says Axel Lavenius.
Important to scrutinize the funds' holdings
In practice, it is difficult for retail investors to save sustainably in funds, even if they want to. Axel Lavenius believes that before choosing a fund, it is important to do your own research, to ignore marketing and to examine actual holdings, e.g. the top 10 companies.
At the same time, the study shows that there are some encouraging signs for those who want to save in funds with stronger links to the green transition.
Start by looking at funds categorised as Article 9, especially in the energy and transition sectors. Unsustainable factors such as emissions are easier to identify in the energy sector than elsewhere
, says Axel Lavenius.
We have better data from the energy sector. Because carbon emissions are monitored more closely, it's easier for fund managers to select companies that are in line with climate targets. At the same time, renewable energy technologies have become financially competitive, and EU climate policy has strengthened their position. These are factors that make it easier for green funds in the energy sector to stand out
, says Mark Sanctuary.
In total, the study analysed nearly 7,000 European funds. The analyses were carried out in collaboration between KTH Royal Institute of Technology, Stockholm University, Stockholm Resilience Centre and IVL. To compare the funds, the research team used a method originally developed in ecology to analyse the similarity between species in different habitats. The conclusions have been published in the European Journal of Finance.
Read the study here External link, opens in new window.
For more information, contact:
Axel Lavenius, axel.lavenius@ivl.se, tel +46 (0)10-7886698
What is the SFDR?
The EU's Sustainable Finance Disclosure Regulation (SFDR) applies to financial actors and advisors within the EU, such as banks and fund managers. The requirements concern transparency, classification and reporting. Supervision is undertaken nationally, without central EU oversight, and in Sweden, the Swedish Financial Supervisory Authority is responsible. The focus of the SFDR is on accurate information, not on actual sustainability impact. This creates scope for ‘legal greenwashing’, despite formal compliance.