About 40% of European Union-listed fund assets under management, or 4 trillion euros, are marketed as sustainable.
According to Morningstar data, investment funds labeled as sustainable under the EU’s new Sustainable Finance Disclosure Regulation managed 4.05 trillion euros in assets under management, or $4.63 trillion, as of the end-2021, Reuters reports. In comparison, sustainable fund assets were valued at about 2 trillion euros back in April last year after the EU’s rules were first introduced.
The surge in sustainable fund assets has been attributed to increased demand among investors for investments that track environmental, social, and governance principles, along with managers reclassifying existing products as aligned with a sustainable criteria.
Based on the new regulations, which were introduced to provide greater clarity for investors seeking ESG-related investments, managers can reclassify their funds under varying Articles.
For example, Article 9 identifies investment funds that are fully compliant on sustainable objectives, while Article 8 indicates that the funds include “among other characteristics, environmental or social characteristics, or a combination of those characteristics.”
On the other hand, investments classified as Article 6 are traditional products, which do not focus on sustainability.
The EU’s Sustainable Finance Disclosure has helped the industry better define ESG goals and provide greater transparency on the investment category, but some critics still warned that the loose definitions have allowed money managers to bend the rules. Consequently, there are now a wide array of products, ranging from “light green” funds with limited sustainability goals to climate-focused “dark green” products that are marketed under the same Article definitions.
Morningstar even noted that some funds classified as sustainable had made no changes in holdings, such as dumping certain companies or sectors that are not viewed as sustainable, but they received a free pass because their other holdings passed muster.
“Such light-touch and business-as-usual approaches have legitimately raised concerns that asset managers are greenwashing their product ranges,” the Morningstar analysts said.
Investors “could be misled in thinking that funds marketed as promoting ESG characteristics or pursuing sustainable goals” were different from funds not marketed as such, the analysts warned.
“That said, it is also important to keep in mind that SFDR classification is about disclosing relevant ESG information, but it doesn’t constitute an ESG label and additional analysis and metrics are required to assess funds’ ESG credentials,” the report’s authors added.
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