COP29, the United Nations-sponsored climate conference, is being held in Baku, Azerbaijan, from Nov. 11-22. The theme is “Solidarity for a Greener World.”
Although flows to European sustainable funds tell us that investor interest is down from the years immediately after the pandemic, climate risk issues remain in the spotlight because they can negatively impact financial returns as well as our planet. In addition, the transition to a lower-carbon world has created new investment opportunities in areas such as renewable energy and the circular economy.
After record warm weather in 2023, this year is the was the second consecutive year with markedly above-average temperatures, with all the attendant consequences, from wildfires to droughts and floods. Yet, Morningstar Sustainalytics data speak for themselves: most companies do not have a credible climate transition plan.
Companies Lagging Behind on Decarbonization
Some 74.7% of global companies analyzed according to the Low Carbon Transition Rating – nearly 10 thousand companies in all – are “significantly misaligned” with the commitment to limit global warming to 1.5° above pre-industrial levels set by the Paris Agreement (COP 21). 22.3% are “moderately misaligned,” 2.4% are highly misaligned, and a remaining 0.5% are “severely misaligned.”
Morningstar Sustainalytics analysis shows that high climate impact sectors such as energy, transportation, construction, industrial, and mining have a greater degree of misalignment with the Paris Agreement commitments. These figures are worrisome considering that these are the sectors that account for 70% of market capitalization in Europe and more than 60% globally.
According to the International Energy Agency (IEA), the energy sector is responsible for more than three-quarters of total global greenhouse gas (GHG) emissions. China and the United States are the most polluting countries, together responsible for about 45% of global emissions, followed by the European Union, India, Russia and Japan.
Although oil companies are diversifying their operations by investing in alternative sources, such as wind, solar and hydrogen, the path away from fossil fuels has many obstacles, including political choices and economic dynamics.
Climate Transition Declining in Popularity
Environmental themes, particularly those of energy transition, attracted significant capital flows in recent years until mid-2023, making funds and ETFs specializing in these themes among the largest in terms of assets within the universe of so-called thematic strategies, with about EUR 37 billion (£30 billion) in assets as of June 30. Subsequently, they were hit by redemptions, as were most thematic funds and ETFs.
More generally, sustainable funds are experiencing a period of declining popularity after a boom between 2020 and 2021. According to the latest Morningstar report on these strategies, European sustainable funds raised EUR 34.3 billion in the first nine months of the year, compared with EUR 67.6 billion in the first nine months of 2023.
Fighting Greenwashing
Will sustainable funds make a comeback among investors? Regulation certainly plays an important role in providing clarity, especially in the fight against greenwashing. For example, the new ESG fund naming rules-which will go into effect for new products as of Nov. 21 and which existing ones must also align with by May 21, 2025-provides common minimum standards for terms used in names, with the aim of protecting them against misuse or purely marketing.
During this week, Morningstar will delve into sustainable investment issues, with a focus on environmental issues close to COP 29.
Monday, November 11
Tuesday, November 12
Best Sustainable ETFs
The best stocks in the hydrogen sector
Wednesday, November 13
Six undervalued wind sector stocks
Thursday, November 14
Flows into sustainable funds
Friday, November 15
Undervalued securities in ESG funds
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
