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New bonds sold by fossil fuel companies were bought by major providers of exchange-traded funds, including BlackRock and State Street, even as those managers braced for commitment to reduce their exposure to carbon emissions, researchers have found.

About 14% of the value of new bonds purchased by 35 of the largest U.S. corporate bond ETFs between 2015 and 2020 were issued by carbon-intensive companies in the oil and gas, utilities and coal mines, according to a new analysis from the Oxford Sustainable Finance program at the Smith School of Enterprise and the Environment at the University of Oxford.

The ETFs were managed by BlackRock, State Street and DWS, signatories of the Net Zero Asset Managers Initiative implemented in December 2020, as well as Pimco and Charles Schwab. Vanguard, the second largest asset manager in the world after BlackRock and also a signatory, only discloses its ETF holdings on a monthly basis, so it was not included in the Oxford analysis.

“It’s when new bonds or stocks are issued in the primary markets and bought that capital really shifts from the financial system to the real economy. Financial institutions need to know how they are contributing to capital flows that could help or hinder the fight against climate change, ”said Ben Caldecott, founding director of the Oxford program.

ETF providers should strategically choose new bond issues to buy and finance only companies that have strong plans to reduce carbon emissions, Caldecott said.

Newly issued corporate bonds are often sold at a discount to attract buyers. ETF managers can buy newly issued bonds before they are included in an index, which can boost the performance of a tracking fund. Buying the newly issued bonds therefore effectively means that the funds can gain an additional performance advantage by investing in these carbon-intensive industries.

Carlo Funk, head of environmental, social and governance investment strategy for Europe at State Street Global Advisors, said ETF providers are legally required to track an index as closely as possible.

“Asset managers have some latitude when using sampling to choose particular bonds, but it is always imperative to minimize the tracking error of an ETF against the benchmark under -jacent. Investors could potentially give managers more leeway with a tracking error, but any change would require client agreement or could be seen as going against the investment objective defined by law. ‘ETF,’ Funk said.

BlackRock, as the world’s largest bond ETF manager, was responsible for most of the purchases of newly issued bonds by carbon-intensive sectors along with State Street.

Bonds issued by carbon-intensive sectors accounted for 14% of the value of new issues acquired between 2015 and 2020 by BlackRock’s $ 80.7 billion US global iShares bond ETF, known as AGG .

About 9.2% of the value of new bonds purchased during the same five-year period by BlackRock’s $ 56.4 billion iShares Corporate Bond ETF, known as LQD, have been emitted by carbon intensive sectors.

BlackRock did not respond to requests for comment. However, Larry Fink, chief executive of the world’s largest asset manager, said in his annual report letter to clients in January that the portfolios of BlackRock investors as a whole remained carbon intensive.

“This cannot and will not change overnight, and BlackRock’s overall portfolio will necessarily be subject to the investment decisions of our clients,” Fink wrote.

Caldecott said a key question for ETF providers was whether climatic factors played a role in ‘active’ investment decisions made by ETF providers when evaluating new issues from obligations.

“Do they take into account environmental, social or governance measures? ” He asked.

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