In a new study, analysts at Goldman Sachs Group Inc. have found that fund managers are increasingly including oil, gas and mining stocks in portfolios that are ESG-registered.

The development coincides with a regulatory review of how to design environmental, social and governance strategies, opening the door for ESG investors to hold assets that could be green one day, even if they aren't yet. It also follows prolonged attacks by the US Republican Party, which has repeatedly accused the ESG industry of blacklisting fossil fuels.

Goldman's research looked at funds registered under the European Union's Sustainable Finance Disclosure Regulation, which is the world's largest ESG investment regulation. The SFDR has two categories of sustainable funds: Article 8 (broader) and Article 9 (stricter). The analysis found that fund managers are generally more exposed to oil, gas and mining stocks now than they were 12 months ago.

Among Section 8 funds, a category that Bloomberg Intelligence estimates covers more than $7 trillion in assets, 51% now own at least one oil and gas company, up from 47% a year ago, the Goldman analysis found. In metals and mining, 46% of Article 8 funds own at least one company in the industry, while the equivalent figure for Article 9 managers is 32%, the analysis shows. That's up about 5% to 6% from a year ago, Goldman found.

Although ESG funds continue to be generally underweight commodities, “we see more willingness to own metals and mining companies,” Goldman analysts including Evan Tylenda and Grace Chen wrote in the report, which was released this week. . And there is evidence that ESG fund ownership of oil and gas stocks has “increased slightly,” they said.

SFDR is currently in the midst of a major overhaul following a lengthy consultation period. The revamped version is expected to make more allowances for transition investments, meaning fund managers will be able to hold previously questionable assets provided they can show that their ownership is helping to improve the ESG profile of a possession.

Changes in the ESG regulatory landscape in Europe “will drive the advent of improved integration of transition/improvement funds as credible sustainability strategies, which can drive flows to traditionally excluded companies,” Goldman analysts said.

The findings follow signs of a wider retreat from ESG in recent years, amid thin returns and mixed evidence of any positive environmental or social impact.

In the first half of 2024, Article 8 and 9 funds had a combined outflow of $17 billion, compared with $68 billion in inflows for non-sustainable equity funds (a category known as Article 6 within the SFDR), it found the Goldman analysis.

However, in May and June, Article 8 and 9 funds saw “modest net inflows” and despite net outflows during 2024, assets under management in both categories of funds are near “all-time highs”, the analysts said.

Meanwhile, stable fixed-income funds generated $115 billion in inflows, compared with $75 billion for volatile funds, Goldman analysts said.

“Fixed income flows remained strong, broadly attracting inflows across categories against the macro backdrop of a longer-term higher-rate environment,” they said.