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Why climate indices and portfolios (almost) fail to deliver: a look at a pioneering study by EDHEC

Felix Goltz , SciBeta Director of Research
Noël Amenc , Associate Professor of Finance
Victor Liu , Scientific Beta

For many years, the financial sector has been positioning itself as part of the solution to climate change and the associated risks. Here is a detailed look at the study conducted by Noël Amenc, Felix Goltz and Victor Liu (1), researchers at the EDHEC-Scientific Beta Chair on Advanced ESG and Climate Investing, who have shown that traditional climate investment strategies do not meet the challenges and expectations.


Reading time :
4 Nov 2022

The gap between reality and the intentions of the financial sector, which positions itself as part of the solution to climate change and the associated risks, is sometimes so wide that it is akin to greenwashing. How and why is this "green" promise not being kept? What new regulations, measures and practices should be promoted so that financial players can really take effective action on climate change? The study conducted by Noël Amenc, Felix Goltz and Victor Liu (1), researchers at the EDHEC-Scientific Beta Chair on Advanced ESG and Climate Investing, has shown that traditional climate investment strategies do not meet the challenges and expectations. Here is a detailed look at this pioneering report, published in the summer of 2021, which received a certain amount of attention from the media and the financial industry.

The impact of human activities on climate change, and the ambiguous role of investors

Scientists are unanimous: climate change is widespread, rapid and intensifying. The summer of 2022, punctuated by disasters in the four corners of the globe, will undoubtedly mark a turning point in the relationship of public opinion, decision-makers and private actors to the reality of climate disruption. In its 2021 report, the IPCC demonstrated that human activity is "unequivocally" responsible for global warming, which is causing "rapid changes in the atmosphere, oceans, cryosphere and biosphere". With +1.1°C recorded since 1850-1900, it has undoubtedly caused global temperatures to rise at an unprecedented rate. According to the report, the global temperature is expected to rise by 1.5°C as early as 2030, ten years earlier than the IPCC's previous forecast. However, according to the United Nations (2), to act against this warming, greenhouse gas emissions would have to be reduced by 7.6% per year between 2020 and 2030.


Among human activities, the primary cause of climate change is the extraction and use of fossil fuels, such as coal, gas, lignite and oil, responsible for 80% of global CO2 emissions.


The banking and financial sectors maintain - through their traditional and historical investments - these energy-intensive and polluting fossil fuel activities, on which our modern societies rely, whereas the energy transition is the sine qua non condition for the integrity of our planet. According to the report "Banking on Climate Chaos" (3), published in March 2021 by six international NGOs, the sixty largest banks in the world have granted 3800 billion dollars to companies active in fossil fuels since the Paris climate agreement, adopted in 2015. Fossil fuel financing was thus higher in 2020 than in 2016. The growing gap between the ambitions of greener finance and the effect of the sector's actual practices on the climate seems to reinforce the difficulty of achieving an ambitious energy transition.

Le financement des combustibles fossiles était plus élevé en 2020 qu'en 2016 Rapport « Banking on Climate Chaos »)


The first regulatory and financing tools are still too timid

Awareness of the major challenge of protecting the environment dates back to the 1960s, but only concerned a minority of citizens. It was mainly in the mid-1990s that governments decided to start taking action, and since then they have taken a whole series of public measures concerning the energy consumption of buildings, recycling, the fight against waste, pollution and the reduction of plastic... These actions have been accompanied by direct or indirect fiscal and financial measures aimed at combating climate change, in particular by targeting the most polluting players. Among these main regulatory and financial tools based on market mechanisms, we can mention:


  • Carbon tax: a tax on fossil fuels, such as gas, oil and their derivatives, which emit a large amount of CO2 . Its aim is to encourage individuals and companies to change their practices. However, its unpopularity and the many exemptions or refunds of this tax (4) make it a relatively limited tool at this stage.


  • Country-specific carbon trading: a mechanism for trading greenhouse gas emissions that is negotiated in international forums. This is one of the incentives provided for in the Kyoto Protocol to encourage states to reduce their emissions and to opt for new, lower-cost technologies. Like the carbon tax, this mechanism should facilitate the achievement of collective climate objectives. However, it requires countries to agree among themselves, and it is also a source of dissension among states. Some developing countries do not accept these measures, which, according to them, hinder their economic catch-up, whereas many developed countries have been able to benefit fully from the potential of the industrial revolution for more than two centuries.


  • The proposed carbon tax at the EU's borders to come into force in 2025: a carbon price set for imports of certain products. The aim is to prevent the relocation of polluting industries to countries where standards are less strict and CO2 emissions are not taxed as in the European Union. This is a way of getting trading partners, such as China, to implement a more ambitious climate policy. However, this project promises new sources of tension between countries. It has been described as a "protectionist" and "discriminatory" measure by several emerging countries.

Le secteur financier en ordre de marche face au changement climatique ?


Is the financial sector ready for climate change?


These public regulation measures, which are absolutely necessary, are nevertheless insufficient to combat climate change. The "price" of carbon is not commensurate with the negative externalities. Public regulation is therefore only a partial response to the problem.

Private actors, including financial actors (banks, insurance companies, investors), have gradually become aware of the role they should play, for example by favouring companies committed to energy efficiency, carbon neutrality or even environmental and biodiversity protection. This movement has been strengthened by the introduction in recent years of numerous regulations and investor alliances aimed at organising and promoting climate investment. For financial actors, the two main levers for action are capital allocation and involvement in corporate governance.


The 'responsible' provision of capital

Providing capital, i.e. lending money, is at the heart of the investor's business and enables companies to develop their activities. Since the launch of the Principles for Responsible Investment in 2006 by the UN (5), the number of signatories has grown steadily. These investors are committed to integrating Environmental, Social and Governance (ESG) issues into the management of their portfolios. This mobilisation and these initiatives accelerated after the 2008 crisis, a way for the financial industry to regain legitimacy, a new raison d'être and to assert sustainable objectives.


Proactive influence on governance

This part of the action consists of challenging the governance of companies on their contribution to climate change, but also, and in a coherent manner, of redirecting investment flows according to the responses and improvements observed on the part of these companies.
to climate change but also, in a coherent manner, to redirect investment flows according to the responses and improvements observed on the part of these same companies. This movement has been reinforced by the recent implementation of numerous regulations and investor alliances (6) aimed at organising and promoting climate investment and committing to having "zero emission" investment portfolios by 2050 (7).


These investor alliances develop three levers of action:


On the one hand, by financing and helping green companies to grow, so that they have the means to develop and find innovative solutions. On the other hand, by encouraging companies with a high carbon footprint, but which are nevertheless essential, to begin their transition. This is at the heart of the strategies proposed by the alliances.


By engaging investors, shareholders, including NGOs, in a dialogue with management, leaving themselves the possibility of withdrawing from companies if they do not change their practices, if they do not invest enough in their transition or if they continue to develop products that negatively impact the environment.


By proposing and voting on climate resolutions rather than opting out of a company that is considered to be ungreen.



A real craze has thus arisen in the world of investors for climate funds (8), resulting from the desire of regulators to push financial institutions to recognise the climate risks borne by their asset portfolios and to make them public. The aim is to minimise the negative impacts of financial flows.

Unfortunately, the intense communication on the part of financial industry players is confronted with another reality. The discrepancy between the promises of climate-friendly investment strategies and the reality of the concrete consideration of companies' climate performance is so notable that we can speak of greenwashing.

Greenwashing, a practice that limits and discredits the intentions and impact of the financial sector

Many manufacturers, under pressure from regulations and citizens, declare their commitment to the environment or the climate. If these declarations anticipate too much a real structural "green" implementation, from the production and choice of inputs, to the distribution channels, via the packaging, these same manufacturers can be accused of practising greenwashing.

Definition: Greenwashing is the contraction of the word "green" and "washing". It literally means "to wash in green" and is translated into French as ecological image whitening. It refers to an ecological façade, a marketing process that exaggerates the environmental properties of a product or an action.

The financial and banking sector is no exception to this drift, and it takes two forms. On the one hand, the greenwashing of affirmation, which consists of publicly declaring one's commitment when in reality too little action is taken. And on the other hand, the greenwashing of complacency, which consists in committing oneself, voting for an unambitious or unrealistic "zero emission" plan and then being satisfied with its announcement effect. This practice can also be found in the use of extra-financial data, in particular by claiming to use climate data without actually using it.

More information: details on the different forms of greenwashing are discussed in the replay of the webinar dedicated to this study (from the 32nd to the 39th minute).

La transition énergétique ne se fera pas sans un changement de méthode et de régulation


The energy transition will not happen without a change in method and regulation

What does the analysis of investment portfolios that claim to be green reveal? The study by Noël Amenc, Felix Goltz and Victor Liu is the first to look at this issue, partly because of the difficulty of obtaining the mostly confidential data. The researchers' work consisted of recalculating and examining stock market indices that claim to be "climate friendly", based on 2,000 listed companies committed to reducing their gas emissions, as well as studying 32 different strategies.


Underweighted climate criteria

They evaluated the key elements of portfolio construction, between market capitalisation, climate criteria and ESG rating. The conclusions are clear: the vast majority of institutional funds and agents that claim to have a positive impact on the climate display attractive climate measures in their portfolios based on the implementation of flawed strategies.

Key figure: In climate strategies that use the carbon score of each company, 88% of the weighting is given to something other than carbon measures. The climate criterion only accounts for a maximum of 12% of the total.


The investment benchmark remains the carbon index

Another issue is how to envisage a climate revolution without changing the investment benchmark. All the technologies used to build climate portfolios have as their starting point the maintenance of a low tracking error with the non-decarbonised index. It therefore seems inconceivable that we should continue to want to set ambitious climate objectives and keep a carbon index as our portfolio benchmark.

Key figure: In climate strategies that combine climate objectives, ESG objectives and CSR criteria, 93% of the difference in the weights of securities is not linked to climate objectives. In these strategies, in concrete terms, no strong priority is given to the climate aspect. The impact of climate metrics is diluted and even weaker than in other strategies.


Sectoral balance is not a concern

Finally, the authors note that some funds do not hesitate to exclude certain stocks, notably those of electricity companies, to improve the "green" scores of their portfolio. But without electricity, there is no growth. The portfolio constructed is virtual, it does not correspond to the real economy.

According to them, the future will be built by taking into account all sectors of the economy. It is in the sectors that have the most difficulty in initiating their energy transition that the most investment is needed.


Inconsistencies between companies' results and their presence in green portfolios

The authors note that "green" strategies are really strategies that are intended to be consistent between the investor's commitment and the allocation of capital. The portfolios are indeed green, they present a strong reduction of the carbon footprint of each stock compared to the classic non-decarbonised index, such as the CAC 40. But the score obtained, which is actually global, is a false reflection of reality. At the individual company level, the study finds inconsistent capital allocations.

Key figure: 100% of the funds analysed in the study are affected by these consistency problems

The study recommends that a fund should not be labelled "green" or "climate" if less than 50% of the weight of its holdings is not driven by climate performance.

These results were also established by looking at the coherence between the commitment of companies on the one hand and the investment decisions in a portfolio on the other. The results show that companies whose climate impact deteriorates over time are not only present in the strategies studied, but also that a third of the stocks that show this deterioration see their weight in the strategies increase. This is an inconsistent signal: on the one hand, companies are encouraged to change their practices, while on the other hand, those that do not do so are valued. It is therefore up to investors to be consistent and credible by aligning their commitment with appropriate portfolio decisions.


This study underlines the willingness of investors to participate in the fight against climate change as well as the challenges of changing the method and regulation that are essential to the success of this objective. But the energy transition will not be achieved without a change in method and regulation. Changing the reference of the carbon economy, which is now incompatible with ambitious climate investment objectives, is essential to fight against greenwashing. It is also the condition for allowing investors to demonstrate creativity, competence and expertise in order to have an effective and credible action on the climate.

Going further

Watch the webinar "Climate deserves better than 12%" on this study, with Noël Amenc and Félix Goltz.


(1) « Doing Good or Feeling Good ? Detecting Greenwashing in Climate Investing », EDHEC publication – August 2021.

(2) « The Production Gap - Special Report 2020 », ONU - December 2020.

(3) « Banking on Climate Chaos – Fossil Fuel Finance Report 2021 », Reclaimfinance.org - 2020

(4) « La composante carbone en France : fonctionnement, revenus et exonérations », I4CE - October 2018.

(5) « Principes pour l’investissement responsable », UNPRI.

(6) For example, the NZAOA alliance promoted by the UN Secretary General, launched in September 2019, endorsed by 37 insurers and pension funds and managing $5.7 trillion in assets.

(7) « Pour un climat vivable : les engagements en faveur du zéro émission nette doivent être étayés par des mesures crédibles », Nations Unies Action Climat

(8) “Investors care about Carbon Footprints”, Gianfranco Gianfrate, EDHEC Vox - May 2019


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