The effort expended by these funds in selecting companies can be seen more clearly by digging deeper: sector exposures tell only part of the story.  All sectors have companies that are high and low GHG emitters.  Consequently, RI funds can exercise security selection to affect their overall level of financed emissions.  The figure below shows for example that although Article 9 funds are overweight Utilities, security selection within sectors allows these funds to achieve an underweight of financed emissions compared to the broad index.  

Impact funds and Paris-aligned funds are underweight most high-emitting sectors, but here too security selection drives emissions down further.

Paris-aligned funds achieve the lowest level of financed emissions, but stand out due to their holdings of companies that have already rapidly decarbonised in recent years. These funds will likely need to adopt more concentrated tilts in future to maintain the emissions path to which they are committed.

The average performance of the four RI styles over the last 5y relative to the MSCI World index is shown below.  For all groups, returns were strong prior to and during the pandemic, but have been more challenged in the years since.  Active fund fees explain some of the downward trend over time, but the groups exhibit very strong co-variation, with Article 9 funds and Impact funds having the highest beta to the common drivers of their performance.  These performance differentials are related to fund flows: periods when flows have been into RI funds have coincided with RI funds outperforming the broader market; similarly flows out are broadly aligned with periods of underperformance. 

All styles of RI fund can and do achieve lower levels of financed emissions than market indices.  But we found that the various style descriptors point to how different funds go further.  Paris-aligned funds deliver, as they advertise, the largest emissions reductions, but since they tilt towards sectors with low emissions and towards companies with existing decarbonisation records, this style is less able to drive real-world emissions reductions.  Article 9 and Impact styles, in contrast, have demonstrated their ability to invest in companies at an earlier stage of their decarbonization path.  Investors here may therefore be able to benefit financially from the green transition, despite relatively higher levels of financed emissions.