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BlackRock Unveils Climate Funds Targeting the Toughest ESG Clients

Solar panels sit on top of a warehouse near the hydrogen electrolysis plant at Energiepark Mainz, operated by Linde AG, in Mainz, Germany, on Friday, July 17, 2020. Europe is pinning its green hopes on hydrogen in a plan that sees hundreds of billions of euros in investment flowing into the clean technology and fueling a climate-friendly economic recovery. Photographer: Alex Kraus/Bloomberg

(Bloomberg) —

BlackRock Inc. is launching two funds designed to live up to the European Union’s highest standard for sustainability, in an effort to draw in investors looking for the greenest products on the market.

The world’s largest asset manager said its new global Climate Action Multi-Asset Fund and Climate Action Equity Fund will carry the so-called Article 9 label, a category within Europe’s ESG investing rulebook that puts sustainability above all else. Such products currently make up only a small fraction of environmental, social and governance funds, but are set to grow in significance as more investors try to shield themselves from greenwashing.

Europe has so far targeted a more aggressive rulebook for ESG investing than other jurisdictions, and last year enforced the Sustainable Finance Disclosure Regulation in an effort to stamp out greenwashing. Money moving into ESG funds in Europe jumped by more than 25% in the third quarter to make up over half of all new inflows, according to figures compiled by Morningstar Inc. 

But even ESG products touting the highest sustainability standards aren’t delivering enough emissions reductions to align with the 1.5 Celsius rise in temperatures needed to avoid a climate catastrophe. According to MSCI ESG Research, only about 11% of Article 9 climate funds align with a temperature increase of no more than 2.5 degrees Celsius with some as high as 4.5 degrees.

Meanwhile, Europe is planning to include natural gas and nuclear power in the taxonomy that underlies its ESG investing rulebook, triggering dismay among investors worried that the step will undermine the credibility of the bloc’s regulatory framework.

Read more: EU Faces Investor Backlash as Gas Headed for Green Rulebook

BlackRock said its BGF Climate Action Multi-Asset Fund aims to deliver a lower carbon emissions intensity score than its benchmark, which is the MSCI All Country World Index and Bloomberg Barclays Global Aggregate Bond Index. It also intends to incorporate a year-on-year decarbonization rate, it said. The BGF Climate Action Equity Fund will try to identify companies that appear to be “long-term, disruptive structural winners” in driving down greenhouse gas emissions, BlackRock said.

Other Wall Street firms are also exploring Article 9 funds in an effort to attract some of the most discerning ESG clients. The asset management arm of JPMorgan Chase & Co. said last month it was launching a fund that met the classification. 

The EU’s ESG disclosure rules force asset managers to divide funds into three main categories: Article 8, for products that promote sustainable goals (often dubbed light green). Article 9, for products that must rank sustainability as their top priority — even higher than pure financial returns (often dubbed dark green). And Article 6 for products that neither have ESG characteristics nor targets; managers must still disclose ESG risks, if any.

Europe introduced two new climate benchmarks last year that require annual greenhouse gas reductions of 7%, but their use by the asset management industry for measuring product performance and designing new investments has so far been limited. That’s despite an explosion in the number of ESG benchmarks generated by the index industry at asset managers’ request.

In the meantime, investing in ESG funds is like trying to navigate “the Wild West” as both regulations and enforcement fall short, according to As You Sow. The shareholder advocacy group looked at almost 100 ESG funds and found two-thirds failed to adhere closely to the principles of ESG investing.

© 2022 Bloomberg L.P.

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