How SDG-aligned are ESG funds?

A new report from sustainable debt firm Util has found that the holding exposure and real-world impact of ‘sustainable’ funds hardly deviates from vanilla funds – with environmental degradation the greatest casualty of all invested capital. 

The report compares the respective holdings of sustainable and total US-domiciled funds, and evaluates the degree to which each group positively and negatively contributes to the UN Sustainable Development Goals (SDGs). 

The results demonstrate that, without regulation dictating what constitutes environmental, social and governance (ESG) investing, nor how it should be integrated and addressed, funds marketed as ‘sustainable’ are commonly exposed to the same constituents as their vanilla counterparts. 

More concerning than greenwash, however, is the discovery that untempered investing is contributing to environmental degradation across the board. 

According to the repity. Greenwashing is rife. In terms of exposure and impact, the sustainable and total fund groups are similarly aligned.

At a sector, industry and company level, the sustainable funds hardly deviate from the mean—despite a higher average fee for the former. And relative goodness doesn’t translate into positive impact.

With all SDG performance aggregated, the sustainable fund group performs just two percentage points higher than the benchmark—for which end-investors pay a premium. 

Investors claim to be ESG, but there’s little mandate to match words with action or intent with impact. 

While sustainable funds have less negative impact, neither group has a significant positive impact.

The SDGs address three themes—planet, people, and prosperity (E, S and G respectively). Both fund groups have a positive impact on the four ‘prosperity’ goals, a slight positive impact on the eight ‘people’ goals and a negative impact on the five ‘planet’ goals. 

While 77 of the sustainable fund names contain the terms ‘green’, ‘clean’, ‘climate’, or ‘sustainable’, only four have a positive impact on the environmental SDGs.

Impact is complicated. There’s no such thing as a ‘good’ or ‘bad’ sector or fund—but good and bad impact arises in unexpected and unpredictable places. 

Util’s machine-learning models discovered relationships between ostensibly uncorrelated investments and SDGs. Sustainable funds are more likely to focus on female-led businesses but don’t outperform on SDG 5 because they fail to invest in female welfare globally. They’re underexposed to healthcare but outperform on SDG 3 because they’re overexposed to transport and underexposed to energy.

To achieve positive impact and avoid unintended pitfalls, portfolios must have a clear objective, address all potential outcomes and consider the full value chain of any sustainability theme. 

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