The European environmental, social, and governance market shrunk by $2 trillion over the past two years as the industry grows more compliant with standardized rules and cuts down on “greenwashing.”

While assets in sustainable investments declined to $12 trillion in Europe over 2020 from $14 trillion in 2018, the falling assets in attributed to falling investment demand for the ESG theme, Bloomberg reports.

The drop in ESG assets in Europe is a result of policy changes that tightened the requirements for what can be considered a responsible investment, according to Simon O’Connor, chair of the Global Sustainable Investment Alliance.

Europe has been a global leader in ESG investments, with banks and fund managers among the most skilled in calculating the impact of operations on climate change and biodiversity. Meanwhile, Eurozone politicians have also pushed for greater sustainability, developing the world’s most ambitious climate strategy to meet climate change goals and new rules to bring industries in line with the Europe Union’s long-term carbon neutrality target.

As a result of clamping down on responsible investments, the EU’s anti-greenwashing rules, or the Sustainable Finance Disclosure Regulation (SFDR), was introduced in March. The SFDR requires fund managers to evaluate and disclose the ESG features of their financial products. Consequently, fund managers are required to classify funds by the new Article 8 designation, funds that actively promote environmental or social characteristics. Additionally, the Article 9 category includes funds that have sustainable investment as their objective. Both categories are subject to higher standards of disclosure under the new SFDR.

The SFDR “has effectively reset the bar as to what can be called sustainable investment, referring to only a subset of what used to be included,” O’Connor told Bloomberg. “Without these changes, we would anticipate that assets under management in the EU would be much higher and remain higher than the U.S.”

According to GSIA’s report, sustainable investment assets in the U.S. rose to $17 trillion last year from $12 trillion two years earlier. The U.S. does not have a comprehensive standardized ESG criteria in place, which has fueled concerns of greenwashing among ESG investment providers.

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