Green bonds: how a jungle of indices turned fossil fuels into a sustainable investment

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When creating their funds, asset-management firms make use of reference indices of companies, known as benchmarks. These indices are provided by rating agencies, and often do not take into account any environmental or social factors for the companies featured in the index. On the contrary: they regularly include oil and gas companies, which are highly profitable.

Europe’s Sustainable Finance Disclosure Regulation (SFDR) contains ambiguities that lend themselves to stretched interpretations. Eurizon, an asset-management subsidiary of Intesa SanPaolo, thus manages to propose “green” funds that have precious little green about them. It does this by using existing benchmark indices of companies which bear scant relation to environmental conservation or sustainability. This despite the fact that Eurizon – which manages client assets worth €381 billion – claims (in its sustainability report) to believe in a “financial humanism based on respect, responsibility, and awareness of one’s own qualities”. It turns out the scheme used by Eurizon is common among asset managers. Let us go through it step by step.

What are benchmark indices for?

How do you assess the general performance of a market – e.g. wind energy – quickly and easily? By compiling a benchmark index of that market, in which the various turbine manufacturers are present, with different weights. The larger companies will have a higher weight in the index and the smaller ones a lower weight. So if the profits of the larger companies increase, the index will show a higher growth value, while the performance of the smaller companies will have less influence on the value of the index.

An asset-management company that wants to build a fund that invests in the wind-energy market can therefore base the fund on a benchmark index that already contains a list of companies operating in the sector. Fund management is said to be “active” when the manager includes or excludes certain companies from the portfolio, according to his or her own criteria.

For a fund that wants to target firms with an “ESG” (environmental, social, and corporate governance) objective, one would expect to see an index containing companies operating in wind power or other such sectors with a positive environmental impact, or perhaps ”