Henry Fernandez, CEO of MSCI, has said passive ESG investing is often misunderstood, especially around the inclusion of oil and gas companies.

Speaking in a Euromoney podcast in Glasgow at COP26, Fernandez (pictured) said ESG investing is not only about picking companies with the highest rating but about how far they are willing to deviate from the market indices.

He added most investment products were trying to balance these two concepts.

“There is a lot of criticism sometimes when people say, ‘this is an ESG ETF and we have found an oil and gas company, how could that possibly be’,” he said.

“It is because the constructor of that ETF did not want to simply have no exposure to the energy sector, they wanted to have a smaller exposure, and to achieve that they need an oil and gas company in there.

“That does not make a fund non ESG, it is just a spectrum of how far you want to be from the market indices.”

Fernandez added if you wanted to create a portfolio of companies that purely decarbonise the world, “it would be a very small portfolio indeed”.

ESG ETFs have come under fire for having exposure to oil and gas companies this year.

A research report from Freetrade last week called for more regulation around what was defined ESG after it found funds, including two ETFs were invested in oil and gas.

The UN’s COP26 summit is aiming to accelerate action towards the goals of the Paris Agreement. Earlier this week, Larry Fink, chairman and CEO of BlackRock, said the industry must bring private capital on the journey to net-zero or risk “the biggest capital arbitrage in our lifetime”.