On Thursday 4 July 2024, LIST announced that its researchers recently published a study in the science journal Nature Communications Earth and Environment shedding light on the substantial environmental and social impacts linked to investment funds.
The research, led by Ioana Popescu and her colleagues, highlights the complex trade-offs involved in sustainable finance.
The Life Cycle Sustainability Analysis (LCSA) group of LIST delved into the environmental and social footprints of various investment funds, revealing in this new study that even funds labelled as sustainable can have significant negative environmental and social impacts. By integrating both environmental and social impact indicators, the team developed a novel quantitative framework, and has applied it to a sample of 230 self-labelled sustainable investment funds.
“Our study challenges the current perceptions of green investments and calls for a more nuanced understanding of what truly constitutes sustainable finance,” declared Ioana Popescu, first author of the paper, which was published in the framework of her PhD thesis conducted at LIST.
The findings reveal that the estimated total environmental and social impacts of the studied investment funds vary widely, challenging the assumption that all green funds are inherently low-impact. Additionally, when comparing pairs of equivalent sustainable and non-sustainable funds, the sustainable funds perform better in certain impact categories but not in all, indicating trade-offs in impact categories for sustainable funds.
This research highlights the uncertainties surrounding the ESG (Environmental, Social and Governance) scores currently used to assess companies in green investment funds according to European standards, such as the Sustainable Finance Disclosure Regulation (SFDR). While the SFDR and other regulations aim to prevent greenwashing by setting high standards, the methodology developed by LIST researchers identifies remaining loopholes and proposes indicators to address them. These indicators align with the requirements of the SFDR and other regulatory frameworks, including the EU Taxonomy and the EU Corporate Sustainability Reporting Directive (CSDR).
The researchers drew on their large expertise in Life Cycle Assessment (LCA) methodologies to examine the supply chain of invested products and organisations behind investment funds, considering thirteen sustainability metrics such as greenhouse gas emissions, land use, water stress and air pollution. By combining them with thirteen social metrics, often known to be difficult to quantify - either because of a lack of data or because of their nature – the researchers reportedly made an “important step forward”. These indicators were specifically chosen to align primarily with SFDR requirements, ensuring that the overall framework is highly relevant for policy implementation.
Another major technique of their work for the future of sustainable finance lies in the combination of financial datasets with input-output LCA (IOLCA). This led to linking company activities with all their indirect environmental and social impacts, enabling accurate fund-level assessments. “A company whose very essence is to contribute to climate neutrality sometimes does not have exhaustive data on the products it buys from suppliers and therefore cannot exclude the possibility that these products may have an environmental or social impact, for example during their manufacture,” explained Thomas Gibon, researcher at LIST and one of the authors of the publication.
By uncovering the hidden impacts of investment funds, Ioana and her colleagues aim to promote more informed and responsible investment practices that genuinely support sustainable development. The authors noted that their research underscores the importance of developing forward-looking scenarios to achieve climate neutrality by 2050 and guide policy and investment decisions. This complex task is the current focus of the team.
