It seemed like an ordinary Tuesday in Frankfurt, the financial heart of Europe. Hundreds of bankers were busy working in Deutsche Bank’s two giant skyscrapers. Across the street at DWS, the asset management division of Deutsche Bank, employees had unsuspectingly started their day as well.

But then, midway through that morning in May 2022, some fifty police officers raided the offices of Deutsche Bank and DWS. Employees were questioned, files were confiscated, and data was retrieved from computer systems. The allegation: greenwashing. DWS allegedly portrayed its financial products as much greener than they really were.

Sustainable investing was once a niche. Ethical investors played a modest role in the abolition of slavery: they refused to make money from industries that employed slave labour. A small group of European and US investors turned their backs on Shell late last century because the Dutch-British company was active in apartheid-torn South Africa.

Then impact funds were created, focussing on investments with a positive social impact instead of excluding companies. For instance, the Dutch sustainable bank Triodos started a fund in the 1990s to finance farmland, favouring organic farming. Its volume: 25 million guilders (€11.3 million). ‘It was still tiny,’ recalls Marilou van Golstein Brouwers. She was the Managing Director of Triodos Investment Management and had a hand in creating the fund. ‘People, including the government, were positively surprised that private individuals were willing to invest in a public cause.’

Image by Sergio Russo, via Flickr.

Nowadays, sustainable investing is no longer ‘tiny’, that is: if we are to believe the financial sector. Since the turn of the century, there has been a steady growth in the number of investment funds that claim to invest their clients’ money sustainably. It started slowly: in 2010, only 3 percent of European investment funds labelled themselves as sustainable.

The breakthrough came in 2015. That year, the Paris Climate Agreement was concluded, the United Nations set the Sustainable Development Goals (SDGs), and Pope Francis called upon humanity in the encyclical Laudato Si’ to be frugal with the Creation. Investors responded. They are no longer merely concerned with financial returns: more and more, they want to help create a better world through their investments.

The financial industry answered that call. In Europe, roughly 100 new funds labelling themselves as sustainable were set up that year; currently, around 100 are added every quarter. According to financial services provider Morningstar, 50 percent of all the money in European investment funds is presently labelled as ‘sustainable’. This amounts to over 4.18 trillion euros, an amount comparable to the market capitalisation of Alphabet, ASML, Coca-Cola, Nestlé, Pfizer, Samsung, Shell, Toyota, Walt Disney, and Walmart combined.

That’s a lot of money. But where does it actually end up? Do the investment funds that promise sustainability – and to which millions of Europeans entrust trillions of euros – deliver on their promise?

The Great Green Investment Investigation was set up to address those questions. This is a pan-European investigative journalism collective, founded by Dutch platforms Follow the Money and Investico, which includes Handelsblatt (Germany), Le Monde (France), El País (Spain), IRPIMedia (Italy), De Tijd (Belgium), Børsen (Denmark), Der Standard (Austria), Luxemburger Wort and Luxembourg Times (Luxembourg). With 26 journalists from nine different European countries, we investigated where exactly the money of European investors seeking sustainable investments ends up.

Trump boosts your sustainability score

A major stumbling block is that “sustainability” has no fixed, legally-defined definition, so one can easily apply the term to almost anything. For many investment funds, it merely means that the so-called ESG criteria (ESG stands for Environmental, Social and Governance) played a role in the decision to invest in a specific company.

This can be interpreted broadly: many funds that claim to be sustainable do not really focus on a company’s environmental, social, or governance contribution to the world; instead, they focus on how changes in environmental, social or governance conditions could affect that company.

Tariq Fancy, former head of the sustainable investment division of BlackRock, the world’s largest asset management fund, explains this as follows: “Suppose Trump returns to power. Many companies’ ESG ratings will then go up, because the likelihood of those companies facing new social or environmental laws in America will decrease. As such, ESG doesn’t really measure a company’s effect on the world, but rather how the world affects a company. Fancy: ‘It’s about value, not values’.”

So the 4.18 trillion euros in European investment funds that supposedly flow into sustainable investments is, in reality, a collection of money pots that each use a different interpretation of sustainability. At one end of the spectrum, sustainable investing means that the fund “considers” ESG scores when deciding to invest in something. Social impact is not a goal, and social harm is no reason to exclude a company; it merely looks at how a world becoming more sustainable might affect a company’s returns.

At the other end of the spectrum we find the impact funds, where financial returns play no, or a lesser, role and success is measured by the social improvement achieved through an investment. Among them are funds that invest in organic farming, nature reserves or education for girls: not because it makes money, but because it makes the world a better place. They define sustainability in a completely different way.

Grey, light green, dark green

The European Union has been trying to clarify the muddled interpretations for several years. In 2018, it developed the Sustainable Finance Action Plan, a strategy to shift money flows from companies contributing to global warming to sustainable initiatives. By now, this plan has become part of the Green Deal, the programme through which Europe aims to become the world’s first climate-neutral continent.

The Sustainable Finance Disclosure Regulation (SFDR) is a key part of that plan. Under those new rules, which have officially been in force since March 2021, fund managers are obligated to provide a sustainability assessment of their fund. They can choose between three flavours: grey, light green and dark green. Grey funds (officially: article 6 and article 7 funds) are merely required to provide an analysis of the sustainability risks they face. Light green funds (officially: article 8 funds) must pursue sustainable goals and must explain how they do so.

Lastly, Article 9 funds. The market promotes this category as the most sustainable form of investing. Companies including BNP Paribas, Deutsche Bank, ABN Amro, Unicredit, Deloitte, Robeco and ING Bank label these funds as dark green.

This category has the highest sustainability requirements. Funds claiming article 9 status must pursue an explicit social or environmental goal, for instance preventing human rights violations or environmental pollution. Moreover, they may not inflict “significant harm” to other sustainable goals in any way. Even if an Article 9 fund only aims to prevent human rights violations, its investments may not significantly harm the climate or nature.

A fund that claims the article 9 classification clearly benefits commercially. While equity markets went down in recent months due to inflationary pressure, geopolitics and impending recession, green funds managed to raise more money in Europe. According to the a (EFAMA), Article 6 and Article 8 funds lost tens of billions since the beginning of 2022, whereas the capital in Article 9 funds grew by 31 billion euros. In other words, the Article 9 flag attracts clients.

This is why The Great Green Investment Investigation focuses on these Article 9 funds to find out what happens to the money of European investors with a sustainable conscience. After all, these funds have to meet the most stringent requirements and should be greener than green.

First, we listed all European funds that classified themselves as article 9. There are 1,141 of them (reference date: June 30, 2022). We then tried to find their complete portfolio and succeeded for 838 funds, three-quarters of the total. Their portfolios collectively contained 130,000 investments worth over 619 billion euros.

We measured these investments against a sustainability yardstick and kept the threshold for being earmarked as a “sustainable investment” low. While the European rules for sustainable investments uses a broad definition of sustainability – from social sustainability, such as respect for human rights and good employment practices, to environmental sustainability, such as preventing harm to nature and water quality – we only looked at climate damage inflicted by the companies in Europe’s darkest green funds. (For more information on our research methodology, click here).

Yet many funds already failed to meet this low bar. In almost half of the dark green funds, we found investments in the aviation or fossil fuel industry. For example, a BlackRock Article 9 fund has over a billion euros worth of investments in energy companies such as RWE (that derived approx. 65 percent of its energy from lignite, coal and natural gas in 2020), ENEL (43 percent) and Nextera (75 percent).

A dark green investment fund from French asset manager Carmignac, which writes in official documents that it “thematically invests in companies that mitigate climate change”, appears to invest in, among others, petroleum supermajor TotalEnergies and in Glencore, a fossil fuel conglomerate with large stakes in Russian oil company Rosneft and coal producer Xstrata.

Money from all over Europe flows from dark green funds to investments in grey companies. In Luxembourg, we found grey investments in 43 percent of the Article 9 funds, percentage-wise the least. In Italy, we found grey companies in over 49 percent of the Article 9 funds. Green money flows to investments in supermajors (including Shell, Total, BP and Saudi Aramco), airline companies (including Lufthansa, Delta and Air France-KLM) and coal giants (such as RWE, Glencore and Uniper).

We found well over 8.6 billion euros worth of grey investments in Europe’s dark green funds. That does not mean that the remainder are explicitly green. The most popular investments are Microsoft (8.2 billion euros), pharmaceutical company Novo Nordisk (7.6 billion), Apple (6.7 billion), Alphabet (4.4 billion) and pharmaceutical company Thermo Fisher (4.1 billion). McDonald’s, Coca-Cola, Pepsico, L’Oréal, and Louis Vuitton Moët Hennessy also rank high on the list.

European investors pay a fee for the composition of their “sustainable” fund. A recent experiment by Paul Smeets, professor of Sustainable Finance at the University of Amsterdam, suggests that the financial sector charges higher fees for sustainable funds. Smeets calls this a greenium, a green premium. This markup ranges from 7.7 to 8.3 basis points. Over the total capital of 619 billion euros invested in dark green European funds, that amounts to an additional annual premium in the range of 480 to 510 million euros.

“And that while sustainable fund managers put the same or even less effort into composing these funds,” Smeets explains. “Besides sustainability factors, they didn’t look at other financial data, for example. And now that your investigation reveals that sustainable funds are also investing in oil and gas companies, investors may be facing double the risk: they pay more for a sustainable fund and invest in something that in reality is not green at all.”

‘In violation’

European-VEB, the advocacy group for European securities owners, is outraged by the investigation results. “It is absolutely reprehensible. You simply cannot use a dark green label to raise billions of euros without being truly sustainable. That label is not a marketing tool, it is a promise to investors.”

Julien Lefournier, former employee of the bank Crédit Agricole and author of L’illusion de la finance verte (“The Green Finance illusion”, Editions de l’Atelier publisher, 2021) calls this ‘strong observations’, which prove that “the rhetoric of article 9 funds [is] often hollow. They go out of their way to make people believe that they are transitioning, but invest in old-fashioned fossil companies.” Reclaim Finance, a French NGO aiming to make capital markets more sustainable, calls these investments “not in line with protecting nature and the climate.” Its German counterpart Urgewald states: “Article 9 funds claiming to support a ‘climate transition’ but actually still invested in expanding fossil fuel companies are denying climate science and acting highly irresponsibly.”

Experts argue that the aviation and fossil fuel industry investments found in Article 9 funds do not comply with European investment rules. “I don’t see how investing in fossil energy cannot cause significant environmental harm,” says ESG expert Ruud Winter. Sjors Vogelsang, a lawyer advising on financial regulatory law, is adamant: “A fund manager who labels a fund as article 9 while it partly invests in fossil fuel companies is in violation.”

‘May I invest in an oil company, yes or no?’

However, the asset managers putting grey investments into green funds believe they are not doing anything wrong. They say it is down to the rules, which would still not make it sufficiently clear that fossil fuel investments do not belong in a sustainable fund.

Amundi, one of France’s largest asset management companies, argues that “the current regulatory framework does not yet allow for a uniform response from the financial industry as to what should be considered ‘sustainable” or not.” Axa, which offers its funds throughout Europe: “The notion of ‘sustainable investment’ remains subject to various interpretations, as the definition given so far by the European regulator [..] is not very precise.” The Spanish industry association for investment funds INVERCO says they “were astonished to see that one of the questions [for the European regulator] was the definition of sustainable investment, more than a year after that the regulation was published.” Dutch Actiam also believes it is not in violation of European regulations, which the asset manager incidentally calls “crap”. “I want clarification. May I invest in an oil company, yes or no?”

However, according to the European regulator, the European Securities and Markets Authority (ESMA), it is not all that complicated. Last summer, ESMA once again clearly explained the rules: “Financial products that have sustainable investment as an objective should only make sustainable investments.”

Still, ESMA will not take action against asset management companies that sell grey investments as Dark Green. While the rules are clear, according to ESMA, it is not responsible for their enforcement. That task lies with national regulators, who seem to be struggling with it.

On the one hand, they find grey investments in a sustainable fund remarkable: “It’s very difficult to reconcile fossil fuel companies with investment funds that have a sustainable objective,” says Raoul Köhler, Sustainable Finance Coordinator at the Dutch Authority for the Financial Markets (AFM). “To me, it seems obvious that shares in highly polluting companies do not belong in such a fund. That will be a big problem.” Spanish regulator CNMV argues that fossil fuel companies are allowed in an Article 9 fund ‘under very specific circumstances’ only. “And even then, they may not inflict any significant harm.”

Yet national regulators argue that the law doesn’t provide them with sufficient guidelines for enforcement. “The text is just not specific enough,” says the French AFM. According to Luxembourg’s regulator, the question arises as to what exactly is meant by greenwashing. “The problem with greenwashing is its complexity and unfortunately there is no uniform definition on a European level at present.” The Dutch AFM says it has asked ESMA to “clarify what constitutes a sustainable investment, and what constitutes ‘significant harm’. We therefore understand why asset management companies are not doing everything correctly yet.”

ESMA doesn’t understand where the ambiguity comes from. Speaking to The Great Green Investment Investigation, the regulator says: “While there is not an explicit ban on fossil fuel investments as ‘sustainable investments’, it should be quite challenging to make such investments under sustainable investments due to the need to show that the investments do not harm any environmental or social objective. [..] it should indeed be quite difficult to argue that fossil fuel investments would respect DNSH.”

Taking action is possible

The raid on DWS proves that it is indeed possible to take action against greenwashing in the financial sector. German authorities took action after discovering that the asset manager recorded in its annual report that ESG factors had been applied in more than half of its total invested assets – 451 billion euros – to make the portfolio sustainable. This turned out to be untrue, resulting in DWS finding the police on its doorstep.

In America, investment bank BNY Mellon was fined one and a half million dollars in spring this year for failing to conduct sustainability checks on investments it promoted as sustainable. Mid-2022, investment bank Goldman Sachs received a 4 million dollar fine after it transpired that ESG analyses had been carried out after the decision to invest in a company had already been made, meaning that sustainability was an afterthought instead of a selection criterion.

Even with grey investments in Europe’s dark green funds, national authorities can simply take action if they want to. This is according to Myriam Vander Stichele, who was part of an expert group that laid the foundation for European legislation and regulations on sustainable investing on behalf of the European Commission. One of her priorities was to empower regulators to take action. “Funds with a clear sustainable objective should not be allowed to invest in shares of fossil fuel companies. They can then not deliver on their sustainability promise. The regulator has the mandate to fine misleading funds.”

She therefore fails to understand why there is no enforcement. “If the AFM does not take action or does so too late, it poses a huge risk. The credibility of sustainable investing is at stake.” Danish consumer organisation Forbrugerrådet Tænk says: “This destroys the confidence in green investment funds, and if that happens, we risk losing the billions for a renewable transition. That will hurt us all.” European-VEB fears irreparable damage: “The biggest cynic of all is the disappointed idealist. We run the risk that a large group of investors who factor sustainability into their fund choice will be disappointed and lose faith in maintaining a sustainable economy.”

Since the beginning of 2022, several European asset management companies have downgraded their article 9 funds to article 8. But in the meantime, numerous new article 9 funds have been added that, in the end, increase the number of funds proclaiming to be dark green.

The Great Green Investment Investigation is a collaborative work by Ties Joosten, Ties Gijzel, Yara van Heugten, Remy Koens, Tom Bolsius, Leon de Korte, Linda van der Pol, Emiel Woutersen, Daniele Grasso, Carlotta Indiano, Fabio Papetti, Mathias Hagemann-Nielsen, Frederik Vincent, René Bender, Sönke Iwersen, Martin Murphy, Lars-Marten Nagel, Ingo Narat, Michael Verfürden, Volker Votsmeier, Joseph Gepp, Lars Bové, Peter van Maldegem, Yannick Lambert, Thomas Klein, Adrien Sénécat. It has been published by Follow the Money, Investico, De Groene Amsterdammer, Børsen, De Tijd, Handelsblatt, IRPImedia, Luxemburger Wort, Luxembourg Times, El País, Le Monde, Der Standard, Domani. Find more on this work on Follow the Money. Check the methodology here.

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