SBTi warns Asset managers over passive fund emissions

May 13, 2022

To have targets approved by the SBTi, asset owners must include passive funds in carbon estimates.

The UN-backed Science Based Targets initiative (SBTi) has warned asset managers should prepare to include passive fund emissions, in addition to emissions from their active counterparts, in their carbon estimations.  

The SBTi stated that managers are currently 'disguising' some carbon emissions within passive strategies that involve elements of active management, which should be included in emissions disclosures.   

Finance lead at SBTi, Nate Aden, has said managers were using passive portfolios as a “kind of a fig leaf.” 

“We need the entire company or financial institution to be aligned, otherwise we’re never going to achieve climate stabilisation,” he continued.  

According to a recent report from climate activists Reclaim Finance, which analysed the activities of 30 fund managers, none had applied fossil-fuel restrictions across their entire suite of index trackers.

Passive investing has become increasingly popular with investors, with these strategies carrying lower costs than their active counterparts. The global passive investment industry soared past $15trn last year, according to Financial Times data.  The SBTi's new rules would attempt to capture emissions currently undisclosed within this growing industry.

Reclaim Finance said it is crucial for “flagship” index funds, which accumulate the most assets, to be included in emissions policies, adding that failure to do so will ensure managers remain the biggest buyers of new fossil fuel investment.  

The International Energy Agency has been clear on the issue, stating there should be no investment in new fossil fuel production if the world intends to limit global temperatures to 1.5oc.  

The Reclaim Finance report revealed some of the largest managers were not applying exclusions for coal across their passive portfolios.  

SBTi is currently developing a framework for the financial services industry to incorporate long-term emissions targets.  

The initiative has engaged 2,000 businesses and financials so far to ensure emissions are reduced in line with climate science.