How sustainable are investments funds labelled as such?

In a recent study published in the prestigious science journal Nature Communications Earth and Environment, researchers from LIST shed light on the substantial environmental and social impacts linked to investment funds. The research, led by Ioana Popescu and her colleagues, highlights the complex trade-offs involved in sustainable finance.

The Life Cycle Sustainability Analysis (LCSA) group of LIST delved into the environmental and social footprints of various investment funds, revealing in their new study that even funds labelled as sustainable can have significant negative environmental and social impacts. By combining both environmental and social impact indicators, the team developed a novel quantitative framework, and has applied it to a sample of 230 self-labelled sustainable investment funds.

Unlocking the shades of green

“Our study challenges the current perceptions of green investments and calls for a more nuanced understanding of what truly constitutes sustainable finance,” declared Ioana Popescu, first author of the paper, which was published in the framework of her PhD thesis conducted at LIST.

Indeed, the findings show that the estimated total environmental and social impacts of the investment funds studied vary considerably, challenging the notion that all green funds are inherently low-impact. Moreover, when comparing two funds that are equivalent sustainable/non-sustainable pairs, they found that the sustainable fund is better in specific impact categories, but not all of these, therefore hinting towards trade-offs in terms of impact categories for sustainable funds as well.

As such, the research underscores the uncertainties surrounding the ESG (Environmental, Social, and Governance) scores currently used to evaluate companies in a green investment fund with respect to European standards such as the Sustainable Finance Disclosure Regulation (SFDR). While this and other regulations already set the bar high to prevent greenwashing, the methodology developed by LIST researchers points out remaining loopholes and proposes indicators to address them. These meet the requirements not only of the SFDR but also of other regulatory frameworks such as the EU Taxonomy and EU Corporate Sustainability Reporting Directive (CSDR).

A pioneering analysis

The researchers drew on their large expertise in Life Cycle Assessment (LCA) methodologies to examine the supply chain of invested products and organizations behind investment funds, considering 13 sustainability metrics such as greenhouse gas emissions, land use, water stress, and air pollution. By combining them with 13 social metrics, often known to be difficult to quantify - either because of a lack of data or because of their nature – the researchers made an important step forward. These set of indicators were selected to align primarily with SFDR requirements, making the overall framework readily pertinent for policy.

Another major technique of their work for the future of sustainable finance lies in the combination of financial datasets with input-output LCA (IOLCA). This led to linking company activities with all their indirect environmental and social impacts, enabling accurate fund-level assessments. “A company whose very essence is to contribute to climate neutrality sometimes does not have exhaustive data on the products it buys from suppliers and therefore cannot exclude the possibility that these products may have an environmental or social impact, for example during their manufacture,” explained Thomas Gibon, researcher at LIST and one of the authors of the publication.

Looking ahead: climate neutrality by 2050?

By uncovering the hidden impacts of investment funds, Ioana and her colleagues are paving the way for more informed and responsible investment practices that truly support sustainable development. As the authors pointed out, this research also shows the importance of developing forward-looking scenarios to achieve climate neutrality by 2050 and guide policy and investment decisions.  This is the complex task that the team is now tackling!

Popescu, IS., Schaubroeck, T., Gibon, T., Petucco, C. & Benetto, E. Investment funds are responsible for substantial environmental and social impacts. Commun Earth Environ 5, 355 (2024). doi.org/10.1038/s43247-024-01479-4