(Bloomberg) -- One of this year’s top-performing managers of so-called sustainable funds has relied on assets that aren’t normally associated with environmental, social and governance investing, in a strategy that’s ended up trouncing his peers.

The Eurizon Azioni Energie E Materie Prime (ticker CARENMP@IM) booked a return of 15.7% this year as of Friday, according to data compiled by Bloomberg. Its main holding is ConocoPhillips, followed by Valero Energy Corp. and Exxon Mobil Corp. The three fossil-fuel stocks top a portfolio dominated by energy and raw materials. The Eurizon fund markets itself as a so-called Article 8 product within the EU’s Sustainable Finance Disclosure Regulation, meaning it “promotes” sustainability.

The contents of the fund “are a bit controversial from an ESG point of view,” said Francesco Sedati, head of research and portfolio management at Eurizon Asset Management, which oversees about $450 billion. But being highly concentrated in energy and raw materials made the fund successful in the current climate, he said in an interview.

As an energy crisis exacerbated by the war in Ukraine drove up fossil-fuel prices, a number of traditional ESG bets have gradually been shattered. Tech assets that once fed outsized returns have dragged down much of the ESG industry, led by BlackRock Inc.’s giant iShares Aware MSCI USA ETF. The world’s largest ESG-labeled exchange-traded fund has declined 22% this year, due mostly to its exposure to Apple Inc., Microsoft Corp. and Amazon.com Inc.

In the US, ESG equity funds aren’t faring much better than the broader market, down 21% compared with a drop of 22% for the S&P 500. In Europe, they’ve performed worse, having lost 20% on average this year, compared with a 16% decline in the Stoxx Europe 600 Index. 

Meanwhile, fund managers who delved into corners of the ESG universe that are traditionally regarded with skepticism have done better across the board, according to Hortense Bioy, global head of sustainability research at Morningstar Inc.

“Some of the ESG funds that performed well this year can attribute their outperformance to their energy overweight and for some as well to other usual ‘unloved’ sectors for ESG funds like materials,” she said. 

Eurizon’s Sedati said the fund’s sustainability categorization under the European rule rests on its exclusion of controversial sectors such as weapons, cluster mines and oil sands, and that it maintains an average ESG rating that’s higher than its energy and materials benchmarks.

The goal is to “steer the strategy towards the most sustainable companies” within the confines of energy and commodities, Sedati said, pointing to an “active engagement” policy carried out by “a dedicated ESG team.” Measures employed include participating in the annual general meetings held by portfolio firms, as well as voting on resolutions and regularly meeting with management, he said.

Ultimately, some institutional and retail clients are “particularly keen to have this sort of sector tilt” in order to hedge against inflation and benefit from the soaring oil price, but they also want an element of sustainability, Sedati said. Ignoring the fossil-fuel industry isn’t an option, he said.

“It’s all about the future allocation of capital,” Sedati said. “You want these companies to commit to plans that have a specific goal of reducing emissions and potentially promoting renewable investments.”

There’s so far little evidence that the wider ESG industry has made a dent in reducing emissions. A March report from the International Energy Agency said global CO2 emissions rebounded last year to their highest level in history.

“It will take time to transition in a credible way,” Sedati said. “Fossil-fuel dependence is still massive” and “excessively forceful decisions” around the closure of historical energy sources like lignite and nuclear have led to the current energy crisis. 

“In the next few years, these trade-offs will be taken into account when deciding on ESG policies,” he said. “But the road is this one, and it shouldn’t be abandoned now.”

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