Funds investing in “brown” or polluting companies would be hit far harder than environmentally-friendly “green” funds in a climate-related market shock, according to the European Union’s securities watchdog.
Brown funds spread investments over a large number of the same companies, while green funds “herd” less, with each one investing in a different selection of companies, according to the European Securities and Markets Authority (ESMA). This suggests greater concentration risks existing across funds whose portfolios contain more polluting assets. In this respect, a preliminary climate risk scenario exercise showed that most brown funds’ losses ranged from 8% to 19% of affected assets, while losses in green funds ranged from 3% to 7%.
This has impacts in terms of the debates around Environmental, Social and Governance (ESG) ratings for investment funds, and the need for greater fund transparency on exposure to climate-sensitive sectors.