Fossil-fuel financing by U.S. fixed-income ETFs increased by 72% in 2020 after funds bought large quantities of new bonds issued amid the COVID-19 crisis.
A center for research at Smith School at the University of Oxford, showed that despite pledges from money managers to reduce carbon emissions associated with their portfolios by 2050, fixed-income exchange-traded funds continued to buy new bonds issued by fossil-fuel companies last year.
A report of the research noted that, while the increased bond buying was also consistent with a 36% growth in fixed-income ETF AUM, the 72% increase in financing also shows how passive funds can provide capital on demand to carbon-intensive sectors.
The additional purchases came amid increased corporate debt issuance in response to the COVID-19 crisis and The Federal Reserve's first ever intervention in the bond ETF market, the report noted.
The research found that, on average, 13.6% of newly issued bonds bought by U.S. corporate bond ETFs between 2015 and 2020 were issued by fossil-fuel companies.
In order to conduct the research, scientists at the University of Oxford developed a metric — the primary market carbon exposure or PMCE — to calculate the proportion of securities linked to fossil fuels that were bought in primary market transactions by ETFs.
The research, which studied 35 ETFs with at least $500 million in assets under management each and with $307 billion in combined assets under management, found that 6.8% to 29.1% of bonds bought by these ETFs in primary markets were fossil-fuel company debt.
Funds' level of exposure to fossil fuels also depended on the type of fixed-income assets that the funds bought, the research found. The average exposure to fossil-fuel sectors obtained through primary investments of high-yield ETFs was 19.8%, while the average exposure of investment-grade bonds was 12.4%.
Researchers also found that through its asset purchase programs the Federal Reserve bought $8.8 billion in 16 ETFs — 13 of which were examined in the research. The move decreased credit risk, improved market confidence and supported new issuance, but it also led to the Fed's own PMCE reaching 13% in 2020.
"Climate conscious financial institutions need to be much better at tracking primary market transactions that directly support fossil-fuel companies. It is when new bonds or shares are issued in primary markets and bought that capital actually flows from the financial system to the real economy," Ben Caldecott, co-author of the research and director of the Oxford Sustainable Finance Programme, said in a news release. "Financial institutions need to know how they are contributing to capital flows that could help or hinder tackling climate change."
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June 16, 2021 at 10:51PM
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US ETFs increase fossil-fuel bond buying in 2020 - Pensions & Investments
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