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Sustainability labels vs. reality: how climate-friendly are green and ESG funds?

Author

Listed:
  • Salakhova, Dilyara
  • Giuzio, Margherita
  • Kapadia, Sujit
  • Mazzolini, Giulio

Abstract

This paper assesses the environmental performance of sustainability-related investment funds compared to conventional ones across three dimensions: financed activities, portfolio carbon footprint, and investment in firms with ambitious science-based targets. We identify ESG funds using Morningstar (MS) strategies, the Sustainable Finance Disclosure Regulation’s Article 8/9 classification, and funds’ self-naming. We find that the greenest funds invest more in low-carbon sectors, but their carbon footprints are comparable to conventional funds. Also, MS Low-Carbon and Art.8 funds tend to invest in the same sectors as conventional funds but target less polluting firms. Overall, results reveal inconsistencies between ESG labels and outcomes, highlighting the limited role these funds currently play in financing the transition to a net-zero economy. JEL Classification: C58, G11, G23, Q50, Q56

Suggested Citation

  • Salakhova, Dilyara & Giuzio, Margherita & Kapadia, Sujit & Mazzolini, Giulio, 2025. "Sustainability labels vs. reality: how climate-friendly are green and ESG funds?," Working Paper Series 3121, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20253121
    Note: 3546207
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    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • Q50 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - General
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth

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