ESG asset recount in Europe to axe all ‘vague’ fund strategies

FUND managers offering hard-to-define strategies such as “ESG integration” will be excluded from the next major tally of Europe’s sustainable investing market.

The European Sustainable Investment Forum, whose most recent estimate put the market at US$12 trillion, is in the process of developing a revised methodology to calculate its actual size.

Chairman Will Oulton said that as “expectations move beyond a basic ESG integration or simple sector-exclusions model, there will be an inevitable recalibration of what constitutes a sustainable investment.”

For anyone trying to get a sense of the real size of the market, “there is little interest today in those strategies that have a minimum level of non-binding ESG integration which have in the past been captured” in estimates, he said in an interview.

The forum, which is known as Eurosif, had been due to provide a revised estimate for 2022. But the review is now expected to be ready later this year as the group finalises the new methodology, Oulton said. The delay follows mass downgrades that have repeatedly hit fund managers offering strategies built on environmental, social and governance metrics amid stricter regulatory guidance.

Eurosif is now working with Professor Timo Busch from the University of Hamburg, who’s developing a methodology to ensure the final figure excludes dubious ESG strategies. According to Busch, Europe’s sustainable investing market may be only half the size implied by the previous methodology. That could make it smaller than the US market, which US SIF said in December was worth US$8.4 trillion, about half its previous estimate.

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Eurosif’s next tally will rule out “vague” ESG-integration strategies, Busch said in an interview. And funds that simply exclude controversial sectors will also be left out, he said.

It’s the latest reckoning to jolt the ESG market during a period of stricter regulations, more sceptical investors and an increasingly hostile political backdrop. Since being coined less than two decades ago, the acronym has become a target of attacks by US conservatives who tie ESG to “woke capitalism.” At the same time, a number of sustainable investing purists say that ESG has been appropriated by big finance, and degenerated into a cover for greenwashing.

Europe’s ESG market has undergone major changes in recent years. In early 2021, the EU enforced the Sustainable Finance Disclosure Regulation, which splits funds into three categories. These include funds that don’t market themselves as ESG (Article 6); funds that “promote” ESG characteristics (Article 8); and funds that set an ESG “objective” (Article 9).

About 5.2 trillion euros (S$7.5 trillion) of assets are registered as Article 8, according to data compiled by Bloomberg that includes funds of funds and money market funds. A further 336 billion euros sits in funds registered as Article 9, according to the data, which measures the market as of Feb 28.

“If you look at Article 8 right now, it seriously suffers because it’s so vague, so basically anything you do on ESG would be sufficient to be an Article 8 fund,” Busch said. Eurosif’s new methodology will “identify the funds with the most ambitious strategies,” he said.

Busch’s system focuses on whether an ESG strategy actively supports the transition towards a more sustainable economy. He divides the market into five categories: exclusions-focused investments, basic ESG investments, advanced ESG investments, impact-aligned investments and impact-generating investments. Only the latter three qualify as sustainable investments under the draft framework.

Oulton, who’s also a responsible investment adviser to First Sentier Investors, said the new approach will reflect the “natural evolution of the market over recent years.” Eurosif’s revised methodology will be made available to sustainable investment bodies across jurisdictions once it’s ready, he said.

“In prior studies, ESG was niche and it was a case of measuring how it was getting closer to the mainstream,” Busch said. But now, it’s “about ensuring sustainable funds actually have a real-world impact.” BLOOMBERG