Many socially responsible funds have popped up in face of heightened demand for sustainable strategies, claiming to adhere to environmental, social and governance principles. However, a new review has recently cut down a number of posers or so-called greenwashing in this market segment.
According to a recent review by Morningstar Inc. based on funds classified as Article 8 under the European Union’s Sustainable Finance Disclosure Regulation, about 23% of “ESG” funds don’t fully adhere to environmental, social or governance investing principles, Bloomberg reported.
Boya Wang, ESG analyst at Morningstar, explained that to meet Morningstar’s definition of ESG investing, the fund strategy can’t just simply ignore sin stocks like coal, tobacco, and weapons to qualify.
“Many Article 8 funds will not be tagged as sustainable funds under our framework,” Wang told Bloomberg.
The EU’s latest update on ESG investing, or SFDR, sought to clarify socially responsible investment criteria to avoid fund managers that were greenwashing or simply claiming they are ESG fund strategies to capitalize on the hype. The framework categorizes investment products under three separate sleeves, including those that only address ESG risks, those that promote ESG characteristics, or those that set measurable ESG objectives.
“There have been several indications from regulators to say, ‘we are watching closely and we will come knocking,’” Sonali Siriwardena, partner and global head of ESG at Simmons & Simmons, told Bloomberg, adding that the recent guidance from the EU “very clearly says one of the likely reasons for regulatory intervention would be that periodic reporting doesn’t support what is said in the product document.”
The framework is already doing its job of weeding out fund strategies with weak ESG pedigrees, with some asset managers actively removing ESG labels from fund strategies before being accused of greenwashing.
“Dropping ‘ESG’ is related to broader rising expectations,” Wang added. Fund managers “think those strategies don’t fulfill the expectations of investors and regulators anymore, so the best way is to drop ‘ESG’ and ‘sustainability’ from their names.”
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