The Les Mees solar park is nestled in the landscape of the Alpes de Haute, France.

The Les Mees solar park is nestled in the landscape of the Alpes de Haute, France. © Laif, Lando Hass

Many green investment funds downgrade their sustainability claim

Despite investment firms claiming just last summer that certain investment funds belonged in the highest sustainability category, a quarter of these funds have now been downgraded by their fund managers. This comes as no surprise. In November, Follow the Money, Investico and international partners revealed that nearly half of these funds had wrongfully been given the highest possible sustainability classification.

Anyone who invested in a sustainable investment fund last year could now be discovering that ‘their’ fund is less sustainable than promised. Now that over a quarter of the supposedly most sustainable funds in Europe have recently been reclassified as less sustainable, this is even very likely. The reclassifications were subsequent to the European Commission and regulators clarifying the rules for sustainable funds. Shortly after this happened, European media revealed the extent of investment fund ‘greenwashing’, with funds designated more sustainable than they actually were.

Joost Schmets of European-VEB, the advocacy group for European securities owners, says the reclassifications show that ‘in principle, mis-selling existed’ in the financial sector. ‘Investors thought they were purchasing a dark green product, but this turned out not to be the case for many of them.’ He uses the term mis-selling somewhat hesitantly: ‘It assumes that the investment firms knew that their classification exaggerated their fund’s sustainability.’

The greener the fund is according to fund managers, the more information they are required to publish supporting the claim

To fight greenwashing in the financial sector, the European Union adopted rules for sustainable investment funds: the Sustainable Finance Disclosure Regulation (SFDR). Since March 2021, fund managers are required to define how sustainable their fund is.

They have three options: dark green funds (officially ‘Article 9’) which must have ‘sustainable investment as [their] objective’; light green funds (‘Article 8’) which must have ‘environmental or social characteristics’; and grey funds (‘Article 6’), which only require the related sustainability risks to have been analysed. The greener the fund is according to fund managers, the more information they are required to publish supporting the claim. The intention: to stop funds from pretending to be greener than they actually are.

This failed to work. In November, Investico, Follow the Money and nine European media organisations, including Le Monde and El País, revealed that Europe’s dark green investment funds – supposedly the most sustainable ones – were investing heavily in fossil fuels and aviation. Nearly half of all dark green investment funds had at least one ‘grey’ investment in 2022.

As a result, investment firms are busy readjusting their sustainability classifications. By now, 35 per cent of the funds available in Europe that invest in the fossil sector and in aviation have downgraded their classification. 307 (27 per cent) of the former total of 1145 dark green funds are now classified light green or grey.

In some countries, like the Netherlands, the reclassified portion is even higher: since June 22, over a third (37 per cent) of the former 426 dark green funds have been downgraded. In cases where Follow the Money found at least one grey investment in a European fund, the difference with the rest of Europe is even more marked. While in Europe 35 per cent of such funds were downgraded (see above), in the Netherlands over half of them (53 per cent) were downgraded. Yet greenwashing is just as common in other countries.

In France, many investment funds were downgraded too, just like in the Netherlands. A possible explanation for investment firms adjusting classifications in these two countries is the fact that their regulatory agencies explicitly addressed the poor adherence to the rules.

Exploding numbers with few consequences

The market for sustainable development is booming. While sustainable investment was still a niche market in early 2000, these days over half of the European investment funds are labelled sustainable. Together these funds have over 4.5 trillion euros in assets.

But these trillions are doing nothing to fight climate change, says Tariq Fancy. And he can know: Fancy is the former chief investment officer of BlackRock, the largest investment management firm in the world. When he retired from the sector, he publicly took stock. The gist of his criticism: there is zero connection between sustainable investment and [fighting] climate change.

According to Fancy, the investment funds labelled as sustainable actually end up doing more harm than good. He explains why: ‘It suggests there’s an easy solution. You tell people that they can beat the market and solve climate change: all they have to do is invest in a sustainable fund. You may have a Nobel Prize winner like economist Bill Nordhaus shouting from the sidelines that this isn’t enough, that what we really need is a tax on carbon emissions, but by then nobody is listening to him.’

We found thousands of investments in companies like Total, Lufthansa, Shell and BP. The total value of these ‘grey’ investments was 8.5 billion euros

The exploding number of sustainable investment funds inspired Follow the Money, Investico and their media partners throughout Europe to examine the sector, to ascertain how sustainable these investment funds really are. Under the moniker The Great Green Investment Investigation we scrutinised all of the European investment funds which were labelled ‘dark green’. In the summer of 2022 these numbered 1145, including funds from well-known major investment firms such as BNP Paribas, Robeco and BlackRock.

We were able to ascertain the entire investment portfolio of three out of four of these: this involved tens of thousands of investments in shares and bonds with a total value of 619 billion euros. Despite the green claims, we found thousands of investments in companies like Total, Lufthansa, Shell and BP. The total value of these ‘grey’ investments was 8.5 billion euros.

‘You can call that a disgrace,’ said Schmets from the VEB investors association, when we presented these results last November. ‘It’s a prime example of the way in which the investment industry is zigzagging its way to sustainability. True courage and the will to change are lacking.’

‘Clarification’ of existing rules

In July 2021, a year prior to the start of The Great Green Investment Investigation, the European Commission clarified how the rules for sustainable investment funds should be interpreted. It did so in response to queries from the sector. The Commission stated that nearly all of the investments included in the dark green funds had to be sustainable. This meant that the investment had to have a sustainable objective and not cause any significant harm to people or the environment. Moreover, sound governance practices were required.

The Commission’s statement surprised the financial sector. Many investment firms assumed that it was sufficient if just some of the investments in a dark green fund met the definition of ‘sustainable investment’. This was precisely how they operated: in June 2022, for 40 per cent of the dark green funds the ambition was to have a maximum of half of their assets invested in sustainable companies.

The new SFDR-2 rules do not change the requirements attached to selecting a sustainability classification

In September 2021, the Dutch Authority for the Financial Markets (AFM) issued a warning. It questioned the classification of a ‘substantial part’ of the funds it had examined, particularly those labelled dark green. ‘The consequence could be that investors’ expectations are wrongfully raised that a fund is focused solely on sustainable investment, although this is not the case.’

Nearly a year later, investment firms began to readjust their classification. NN Investment Partners was among the first to do so, deciding to relabel nineteen dark green funds as light green last summer, referring to the European Commission and the AFM in an explanatory statement. According to NN, the Commission and the AFM had clarified that all investments made by a dark green fund had to be sustainable.

Other firms, such as BNP Paribas, BlackRock and AXA, changed their classifications later that year. In their statements, they referred to a new section of the regulations (SFDR level 2) which would enter into force in early 2023. BNP Paribas stated in November that it was ‘updating’ classifications in order to ‘bring them in line with the current regulatory requirements of SFDR level 2’. Yet the new rules make no change to the requirements attached to selecting a sustainability classification. Fund managers are, however, required to explain in greater detail why their investments supposedly are sustainable.

‘No longer suitable’

Dutch investment firm Actiam claimed to be surprised by the results of The Great Green Investment Investigation. Speaking with Follow the Money in November 2022, Actiam’s head of sustainability, Dennis van der Putten, discovered that they were investing in companies which had over 90 per cent of their turnover generated by fossil fuels. Amongst them: the Norwegian fossil giant Equinor and Japanese natural gas supplier Tokyo Gas. Van der Putten said at the time: ‘If the figures are correct, this is not in keeping with the way we invest.’

Shortly thereafter, Actiam downgraded fourteen funds, with a combined value of over 4.8 billion euros. According to Actiam, it was ‘no longer suitable’ to give the shares and bonds in those funds a dark green classification.

The Actiam Impact Wereld Aandelenfonds, with investments in the China Longyuan Power Group and NextEra Energy, retained its dark green label. The ‘grey’ companies have been removed from the portfolio, however. Actiam is still investing in a NextEra subsidiary which focuses primarily on renewable energy. In a response, Actiam says that it is becoming stricter for companies that still depend on fossil to some degree, since ‘innovative power and speed in transitioning to new sources’ is increasing rapidly. ‘It takes more and more effort to be labelled a “positive impact” company.’

Still mislabelled as dark green 

The investment sector no longer seems to be making ever more green promises. Financial services provider Morningstar calculated that assets in dark green funds have dropped by 175 billion euros (40 per cent) in the past three months. It believes that reclassification has caused this.

Despite all the downgrading, new dark green funds have also been created in recent months. The Netherlands has 155 new dark green funds, while another 220 have been created elsewhere in Europe. ABN Amro, Actiam and Robeco have all launched dark green funds. The total number of dark green funds has hardly dropped.

And dark green funds still invest in fossil fuels and aviation. In late September, the American business bank JP Morgan classified an investment fund as dark green which ‘aims to insulate investors from the risks of climate change and seize the investment opportunities made possible by the transition to a low carbon world’. The fund includes investments in Delta Air Lines and in oil giants such as CoconoPhilips, TotalEnergies, ExxonMobil and Equinor.

In addition, 253 dark green funds where Follow the Money found grey investments last year have not had their sustainability classification changed yet. This applies to the Australian investment bank Macquarie, which has an infrastructure fund it still calls dark green, although Follow the Money and its partners discovered that over 40 per cent of its assets are invested in eleven polluting companies, such as Tokyo Gas, the Italian gas network Snam Spa, and airports in Auckland and Zurich. The fund has only sold a single investment in a fossil company, namely the China Light and Power Company (CLP Group).

It is not yet possible to determine whether funds currently labelled dark green now have greener investment portfolios overall: this requires up-to-date data, such as financial statements. Midway through 2023, Follow the Money, Investico and their partners will be collecting and reassessing the investment portfolios of the green investment funds.

Regulatory developments 

Meanwhile, ways in which the sector can be better regulated are being considered in Europe. At the beginning of January, the European Commission promised to investigate how greenwashing should be addressed. The Commission is evaluating two options. One is to develop stronger criteria for the grey, light green and dark green funds, allowing this classification to function effectively as a sustainability label. The other is to create a new sustainability label for green investment funds which is independent of the SFDR.

Fund managers currently use the term ‘in transition’ to legitimise investments in companies that are not (yet) green

The French Authority for the Financial Markets seems to be anticipating the first option. In mid-February, it published a series of proposals for introducing stronger criteria for light green and dark green investment funds. For example, investing in fossil fuels would be explicitly banned for dark green funds and the definition of a company ‘in transition’ clarified. Fund managers currently use the term ‘in transition’ to legitimise investments in companies that are not (yet) green.

The existing European directive already states that dark green funds are not allowed to cause significant harm to people or the environment. Although legal experts therefore already informed Follow the Money in November that, based on the current directive, dark green funds should not include fossil investments, fund managers still hide behind the legislation’s ambiguous language.

The Dutch Authority for the Financial Markets’ stance is still unclear. Last year, it stated that ‘it is very difficult indeed’ to explain how investment funds with a sustainable objective might include investments in fossil companies, yet it also felt that such investments could not be ruled out entirely. According to the AFM, the definition of sustainability in the European regulations is so vague that enforcement is difficult. It is unclear whether it considers fossil investments taboo for dark green funds. The Dutch AFM has informed Follow the Money and Investico that it is ‘examining the document [from the French AFM] and the matters it addresses.’ 

Translation: David Raats


Macquarie wrote to Follow the Money: ‘Our approach to classification continues to be guided by the regulation, with all the fund’s holdings assessed as meeting the criteria of a “Sustainable Investment” as defined by the Sustainable Finance Disclosure Regulation. We continue to monitor developments and expect our assessment framework to evolve in line with updated regulatory guidance and market expectations.’

Follow the Money did not receive a response from JP Morgan.

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