60% of ex-fossil funds have fossil fuel exposure, says Morningstar

Only 40% of ex-fossil funds in Europe are fossil-fuel free, according to a new report from Morningstar on investment products with climate-related objectives. 

The report analyses 405 funds in Europe and finds close to €60bn is held in climate-aware funds, divided into six types: low-carbon, ex-fossil fuel, climate conscious, climate solutions, green bond and clean energy/tech.

Ex-fossil fuel funds are the most popular strategy, with 165 funds, representing €16.5bn. But the analysis finds only 40% of these funds are fossil-fuel free. 

“Definitions of fossil fuel exclusions can vary greatly, from no investments in companies with fossil-fuel reserves to no involvement in any fossil-fuel-related activities, including exploration, production, and distribution,” it says. 

The report also finds many clean energy funds invest in utilities that still operate legacy fossil-fuel businesses. “Iberdrola derives between 25% and 50% of its revenues from fossil-fuel activities, while Enel derives over 50% of its revenues from these activities,” it says. “Additionally, a few Clean Energy/Tech funds hold energy companies like Neste, which produces renewable fuels, but oil products remain its largest contributor of revenue.”

The report also analyses the carbon risk of different types of funds, and how much they contribute to climate solutions. 

It concludes: “When choosing a climate product, investors should carefully consider their green preferences and carbon risk appetite. As we've seen, ex-fossil fuel or low-carbon funds provide the greatest shield from carbon risk but will offer little in the way of carbon solutions. Conversely, clean energy/tech funds offer high exposure to carbon solutions as expected but also currently hold the greatest carbon risk in the bunch.”

The report highlights the surge in climate-aware funds being launched in recent years. Last year, 76 new offerings came to market, following 67 new launches in 2018. In addition, many existing conventional and sustainable funds have either changed their mandate to focus on the "climate" theme or added specific climate-related criteria to their investment objective. 

Investment flows into funds that market themselves as climate funds grew fourfold last year with €12m inflows in 2019 compared around €3m in 2018. 

Hortense Bioy, Director of Passive Strategies and Sustainability Research, Europe, said both supply and demand would continue to grow, particularly in light of the EU Action Plan on Sustainable FInance.