By Huw Jones
LONDON (Reuters) - Funds that invest in 'brown' or polluting companies would be hit far harder than environmentally-friendly 'green' funds in a climate-related market shock, the European Union's securities watchdog said on Wednesday in its first study of its kind.
The European Securities and Markets Authority (ESMA) published what it described as a first attempt to assess vulnerabilities to climate-related financial risks using data from 23,965 EU-based funds worth 10.7 trillion euros ($12.7 trillion).
"Within the European financial sector, investment funds are more exposed to climate-sensitive economic sectors than banks, insurers and pension funds. However, few investment fund climate-related financial risk assessments have been conducted," ESMA said in its latest summary of market risks.
Brown funds spread investments over a large number of the same companies, while green funds 'herd' less, with each one investing in a different selection of companies, ESMA said.
"This suggests greater concentration risks existing across funds whose portfolios contain more polluting assets," ESMA said.
A preliminary climate risk scenario exercise confirmed this, showing that most brown funds' losses ranged from 8% to 19% of affected assets, while losses in green funds ranged from 3% to 7%, ESMA said.
Brown funds also contributed more to total system-wide losses because they are more interconnected.
"Consequently, this asset valuation exercise can be seen either as a warning sign or as an indicator of opportunities for investment funds to anticipate future trends," ESMA said.
"This also relates to discussions around Environmental, Social and Governance (ESG) ratings for investment funds, and the need for greater fund transparency on exposure to climate-sensitive sectors."
($1 = 0.8396 euros)