The research found that, on average, 13.6% of newly issued bonds bought by U.S. corporate bond ETFs between 2015 and 2020 were issued by fossil-fuel companies.
In order to conduct the research, scientists at the University of Oxford developed a metric — the primary market carbon exposure or PMCE — to calculate the proportion of securities linked to fossil fuels that were bought in primary market transactions by ETFs.
The research, which studied 35 ETFs with at least $500 million in assets under management each and with $307 billion in combined assets under management, found that 6.8% to 29.1% of bonds bought by these ETFs in primary markets were fossil-fuel company debt.
Funds' level of exposure to fossil fuels also depended on the type of fixed-income assets that the funds bought, the research found. The average exposure to fossil-fuel sectors obtained through primary investments of high-yield ETFs was 19.8%, while the average exposure of investment-grade bonds was 12.4%.
Researchers also found that through its asset purchase programs the Federal Reserve bought $8.8 billion in 16 ETFs — 13 of which were examined in the research. The move decreased credit risk, improved market confidence and supported new issuance, but it also led to the Fed's own PMCE reaching 13% in 2020.
"Climate conscious financial institutions need to be much better at tracking primary market transactions that directly support fossil-fuel companies. It is when new bonds or shares are issued in primary markets and bought that capital actually flows from the financial system to the real economy," Ben Caldecott, co-author of the research and director of the Oxford Sustainable Finance Programme, said in a news release. "Financial institutions need to know how they are contributing to capital flows that could help or hinder tackling climate change."