ESG fund chaos angers investors as greenwashing concerns mount

THE head of Europe’s main retail investor organisation will meet with regulators and legislators to convey concerns that a wave of ESG fund downgrades has left savers worried that their money is exposed to greenwashing.

“We need to have much clearer guidance from the authorities to make sure we aren’t misled and we aren’t being sold greenwashed investment products,” Guillaume Prache, managing director of Better Finance, said in an interview.

The group, which represents roughly 4 million financial services users across 25 countries, has scheduled meetings with the European Commission and the European Securities and Markets Authority, he said.

The concerns raised follow announcements from some of the world’s biggest asset managers, including BlackRock, Amundi and Pacific Investment Management, that they’re downgrading tens of billions of US dollars worth of so-called Article 9 funds, the top category under Europe’s ESG investing rules. The reclassifications were triggered by fresh guidance from the EU Commission on how to interpret the bloc’s regulations.

“Asset managers will have to explain to their clients that they’re operating in an uncertain and rapidly evolving regulatory environment,” said Hortense Bioy, Morningstar’s global director of sustainability research. “Let’s be clear, the EU has set a very ambitious, but also extremely complex, disclosure regime.”

Morningstar has estimated that at least US$85 billion in such funds will be downgraded to a less stringent ESG category, known as Article 8, in the coming weeks and months. That’s after the EU’s guidance that Article 9 funds must hold 100 per cent sustainable investments, save for hedging and liquidity requirements, wrong-footed much of the asset management industry.

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“The situation is a bit chaotic at the moment,” Bioy said. The market researcher estimates that less than 5 per cent of Article 9 funds currently live up to the EU’s 100 per cent sustainability requirement, and Bioy has said that hundreds of funds may need to be downgraded before the dust settles.

Yet some asset managers are holding off with reclassifications, often on the advice of lawyers, in the hope that further guidance from EU authorities will allow them to keep current designations. That’s as the Commission looks into a request from Europe’s markets watchdog, ESMA, to clarify what it means by a “sustainable investment.” The Commission has said it’s aware of the issue and is working on the case.

“There is an urgent need for the regulator to not only clarify what qualifies and what doesn’t qualify as a sustainability investment but also what methodologies are acceptable to calculate portfolio exposure to sustainable investments,” Bioy said.

The current lack of clarity has the potential to damage the reputation of Europe’s ESG rulebook, the Sustainable Finance Disclosure Regulation, she said.

“The credibility of SFDR and the whole asset management industry is at stake here,” Bioy said. “We can’t ignore the fact that some investors have invested in these Article 9 funds thinking they were dark green strategies. Even if these strategies haven’t changed and the portfolios remain the same, the perception of the ‘greenness’ of these strategies will change.”

European pension managers are also voicing concerns. Because there’s no current guidance on how to interpret what should go into a sustainable investment, “there is a serious risk of diverging implementation practices and a lack of comparability between products and reporting,” said Anastasios Pavlos, policy adviser at Pensions Europe, whose members oversee a combined US$7 trillion in assets.

For now, it’s too early to say whether pension managers will need to adjust allocations in response to the reclassifications, he said.

Prache of Better Finance said he also wants to talk to European authorities about their ostensible failure to produce a regulatory framework that retail investors can understand.

“There is a provision in EU rules that says that investor information must be intelligible to the majority of the people to whom it is addressed,” he said. But SFDR is “an area – and it’s unfortunately not the only one – where this law is not complied with.” BLOOMBERG