Your ESG fund may be financing fossil fuels, but not in the way you think it is

Silhouettes of fossil fuel smokestacks in a yellow sunset
Image by MonikaP from Pixabay

Environmental, social, and governance (ESG) funds have recently been called out for including holdings of oil and gas companies in their portfolios. ESG funds, often referred to as sustainable funds, are intended to be socially responsible investments, however what constitutes “socially responsible” is still up for debate.

Many consumers, particularly millennials, perceive investing in fossil fuels to be in conflict with social responsibility, but it seems that ESG investment managers don’t always agree. A recent article by the Wall Street Journal reported that eight of the top 10 largest sustainable funds for being invested in oil and gas companies, distorting the reality of what many retail investors may believe they are achieving by putting their money into supposed “sustainable funds.” While this may be frustrating to some, the article also points out that the oil and gas composition of these indexes often make up less than 4% of the whole portfolio. Plus, there are a growing number of fossil free indexes and funds available on the market.

But what about investments in the man behind the curtain, those who are directly supporting the fossil fuel companies?

 JPMorgan Chase (JPMC), the “worst banker on climate change”, is often found in the top 10 holdings of ESG equity funds of some of the largest investment management companies. Rainforest Action Network (RAN) has identified JPMC as the largest banker of fossil fuels by a wide margin. Since the Paris Agreement JPMC invested over $195 billion in fossil fuel projects (from 2016-2018 at the time of the report), with over a third of that spend going directly financing fossil fuel expanders. This year, JPMC was originally selected as one of the lead underwriters of the Saudi Aramco IPO before the oil company turned to local bankers to complete the process.

So, would you want JPMC in your sustainable investment fund?

Looking at the holdings of a variety of ESG funds by some of the largest investment managers and ESG funds on the market, JPMC is often found among the top 10 holdings (see Table A for examples). While JPMC is the worst of the bunch, they are not the only culprit of financing fossil fuels. Other bad banking actors according to RAN’s 2019 Banking on Climate Change report are also commonly found in ESG funds, including Bank of America and Citi Group.


Table A. Examples of JPMorgan Chase and other fossil fuel-financing banks in ESG funds

Fund Name JPMorgan Chase Holdings (Rank & Weight*) Other Top Fossil Fuel-Financing Banks in Top 20 Holdings (Rank & Weight*)
BlackRock iShares ESG MSCI USA ETF #6 – 1.38% Bank of America: #12 – 1.05%
BlackRock iShares MSCI ACWI Low Carbon Target ETF #6 – 0.85% Bank of America: #13 – 0.60%
Bloomberg SASB US Large Cap Value ESG Ex-Controversies Select #1 – 5.65% Information unavailable
SPDR S&P 500 Fossil Fuel Reserves Free ETF #6 – 1.68% Bank of America: #12 – 1.11%
Parnassus Core Equity Fund** N/A Bank of America: #9 – 2.9%
Domini Impact Equity Fund N/A Bank of America: #10 – 1.42%

Citi Group: #20 – 0.90%

* As of December 3, 2019
** Largest ESG ETF as of YE 2018


All fund managers aim to balance risk and return, but ESG fund managers must also factor in some level of ESG impact. Impact, though, is harder to measure. Risk and return are quantifiable through traditional financial data. Quality environmental and social data is harder to come by, even though demand for ESG from consumers and investors is growing rapidly. Organizations like CDP and the Global Reporting Initiative provide methods and tools for disclosing environmental and social information for investors. Other firms like the Global Impact Investing Network and MSCI, among many others, help investors interpret this information, but the market for this data is still early, inconsistent, and nuanced.

With this in mind, some managers think it makes sense to include JPMC and other big fossil fuel-funding banks in the top ranks of ESG funds. Financials is often among the top sector weights of many ESG funds, along with Information Technology and Healthcare. When you consider the environmental impacts of these sectors, they are inherently less environmentally intensive than other sectors due to their relative limited draw on energy or other natural resources for their direct business operations (i.e. compared to Materials or Industrials). JPMC is also often a top performer from a financial returns standpoint in the Financials sector, as Apple and Microsoft are in the Information Technology sector.

It’s clear why JPMC and other big banks are an attractive bet for fund managers, but due to their heavy hand in supporting the fossil fuel industry, there are large externalities excluded from their fund performance. This isn’t just in terms of environmental impact, but also financial risk. While the financial sector is waking up to these risks, the industry has a long way to go before their true environmental and social impacts are properly accounted for on the books.

So how do you ensure your money is invested with your values?

At the end of the day, ESG investing is all about values. But values are subjective. Here are some tips to make sure you consciously invest your money where your mouth is:

  • Understand your priorities. The world of ESG is incredibly broad. It spans a range of social and environmental issues, from low carbon to gender equity to water security. It is rare for a single fund to do well across all ESG categories. Understanding your top ESG issues will help you assess and prioritize which funds you choose to invest in.
  • Do your research. When evaluating fund options, look up the portfolio’s holdings and investment methodology. Most allow consumers to view at least the top 10 holdings, if not the full portfolio. You can also ask for details on their investment strategy and due diligence. Do the top holdings match your priorities? Are you seeking funds that completely exclude certain sectors, and does their methodology align? There are some websites that have done this research for you on a variety of issues, such as and
  • Talk to a financial adviser. If you find yourself lost and overwhelmed in the endless abyss of ESG fund options, call an adviser. Most financial firms allow you to speak with a qualified professional for free to inquire about your interests and investment needs. There are often fees associated with investing in specific funds or having a custom ESG portfolio developed, so be sure to ask about costs before committing to an investment.

The market for ESG investing is rapidly growing, but it is important to understand its nuances if you are seeking to invest in line with your values. As demand continues to grow and the data to measure social and environmental impacts improves, so should the quantity and quality of ESG funds on the market. Until then, be mindful of your investing priorities and do your due diligence to ensure you are putting your money where your values are.

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