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Synthetic funds use derivatives to replicate an index and hold shares that serve as collateral for the swap counterparty. The concerns related to some of those holdings © Reuters

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Synthetic “sustainable” index-tracking and exchange traded funds run by firms including BNP Paribas and Amundi hold polluting companies as collateral, Ignites Europe has found, risking undermining investor trust.

A synthetic index fund replicates the performance of an index by using derivatives rather than investing directly in the index’s constituents. The fund holds shares that serve as collateral for the swap counterparty.

BNP Paribas Easy MSCI Emerging SRI S-Series PAB 5% Capped and Lyxor MSCI EM ESG Leaders Extra Ucits ETF are among the funds that hold non-sustainable assets as collateral.

Amundi, Europe’s largest listed asset manager, completed the acquisition of Lyxor at the start of the year.

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The €772mn BNP Paribas index fund had exposure to oil major TotalEnergies, food multinational Danone and cement company HeidelbergCement in its collateral holdings, as of early September.

TotalEnergies and HeidelbergCement are major emitters of carbon emissions, while Danone has been criticised for its bottled water sales.

Earlier this year Reclaim Finance, a climate action group, said TotalEnergies had a “very weak” climate plan and the oil group was “very far from” being a sustainable investment.

The BNP Paribas fund is classified under article nine of the EU’s Sustainable Finance Disclosure Regulation, meaning it must explicitly follow a sustainable investing strategy, contributing to positive environmental or social outcomes.

Meanwhile the €78mn Lyxor MSCI EM ESG Leaders Extra Ucits ETF, held fuel producer Valero Energy in its substitute basket, as of early September.

In 2020, Valero Energy was ordered to pay a $3mn civil penalty to settle allegations that the company and its affiliates violated the US’s Clean Air Act fuel requirements.

Lyxor’s ETF is classified as article eight, which means it should consider environmental or social factors.

Detlef Glow, head of Europe, Middle East and Africa research at Refinitiv Lipper, said managers would typically build a collateral portfolio that has “high liquidity” and “low transaction costs”.

However, he said “unexpected holdings” could “undermine the trust of investors” and lead to “higher levels of regulation”.

“The industry is testing boundaries, which is part of the inevitable growing pains of a young market approaching maturity,” Glow said.

“It feels like ESG has been around for decades, but the journey has just begun and further market consensus, as well as regulatory initiatives, will shape the future for ESG-related products.”

BNP Paribas said the collateral basket was “ESG compliant” because it applied its “sustainable policies” to the stock selection process and “stocks with the poorest ESG scores” were excluded.

Amundi declined to comment.

Other firms that manage synthetic sustainable index funds include Natixis Investment Managers affiliate Ossiam and DWS.

Ossiam manages the €222mn Stoxx Europe 600 Equal Weight NR Ucits ETF, which is classified as article eight under SFDR.

The ETF held biofuel company Neste as collateral in early September, German automotive and arms manufacturer Rheinmetall, and Wacker Chemie, a chemical producer that was fined last year for an incident that killed a worker in 2020.

Ossiam said Neste was recently removed from the collateral basket. The manager said any controversial incidents or conventional arms manufacturing were “not sufficient grounds” for exclusion from the ESG filters that are used on the collateral, however.

Frederic Bach, head of ESG and responsible investment at Ossiam, said: “We are complying with regulation regarding the collateral to the swap that is held in the fund.

“The sector and industry exclusions are under review, with the aim of being tightened.”

DWS manages five article eight synthetic ETFs, but they do not hold polluting companies as collateral. The company said it had agreed on a list of stocks with swap counterparties from which substitute basket assets can be sourced.

“There are no minimum SFDR requirements with regards to a minimum number of ESG filters nor their nature or the active share versus a benchmark universe as a consequence of those filters. It is a challenge for the overall ETF industry,” DWS added.

A person familiar with the situation says that while there was no guidance on the treatment of collateral in the SFDR rules, European regulators were discussing the issue.

Lara Cuvelier, sustainable investments campaigner at Reclaim Finance, said funds that use synthetic replication of indices should not be treated differently.

“A fund should not be presented as having a ‘sustainable investment objective’ or sell it as ‘sustainable’ if it is invested in companies that undermine the EU’s climate sustainability goals,” she said.

Cuvelier said asset managers should have “firm-wide policies” on the most polluting sectors and on how they intend to manage the issues with their passive investments, in order to give clarity to investors.

Glow said asset managers should align the holdings in their collateral with the overall strategy of the fund, and should not risk any avoidable loss of client trust.

He added that “regulators have set investor protection as one of their major tasks”, and so they should take action and create a “more restrictive regulatory regime” around collateral for funds that claim to be sustainable investment products.

Cuvelier agreed, saying “minimum standards” for sustainable funds were needed as the SFDR classifications did not provide any guarantee on the sustainability of a fund.

“National regulators will have to define what they think should not be in a sustainable fund,” she said.

*Ignites Europe is a news service published by FT Specialist for professionals working in the asset management industry. It covers everything from new product launches to regulations and industry trends. Trials and subscriptions are available at

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