Europe fund managers cleared to undo 76.3b euros of ESG downgrades
REVISED guidance from Europe has cleared the way for asset managers to reverse 76.3 billion euros (S$111.5 billion) worth of ESG (environmental, social and governance) fund downgrades.
The figure reflects the value of funds tracking climate-transition and Paris-aligned benchmarks that lost the European Union’s highest ESG designation late last year, according to Morningstar. The European Commission (EC), whose initial guidance triggered the downgrades, has since said they were unnecessary.
The fund industry is struggling to keep up with continual regulatory revisions that have hit the ESG market, frustrated portfolio managers and angered investment clients.
The Sustainable Finance Disclosure Regulation (SFDR) – the European Union’s (EU) ESG investing rules – are intended to protect against greenwashing, but have more recently been criticised for enabling it.
A total of 175 billion euros worth of client assets lost the EU’s top ESG tag – known as Article 9 – in the fourth quarter of last year, after the EC sowed doubt about its application.
Those funds were reclassified as Article 8, a weaker ESG designation that analysts warn is facing its own period of turmoil amid a new wave of regulatory proposals that is making its way through the EU.
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Some asset managers have already signalled that they are preparing to reverse previous Article 9 fund downgrades. The investment arm of BNP Paribas said last week it is now looking into how many of the funds it changed to Article 8 should be restored to Article 9. The firm lowered 15.6 billion euros worth of funds late last year.
In its new guidance, published on Apr 14, the EC said SFDR is “neutral” when it comes to financial product design, and that investments “that have an objective of reduction in carbon emissions can therefore fall within the scope” of Article 9.
That applies “whether they use a passive or active investment strategy”, it said.
The EU’s executive arm also responded to criticism that it had so far failed to provide an adequate definition of a sustainable investment, potentially undermining the industry’s ability to apply ESG rules in any meaningful way.
In its latest guidance, the EC signalled that asset managers will continue to have considerable freedom to use their own definition, provided they document their claims.
“This policy choice gives financial market participants an increased responsibility towards the investment community and means that they should exercise caution when measuring the key parameters of a ‘sustainable investment’,” said Hortense Bioy, global director for sustainability research at Morningstar.
“With this, the Commission has confirmed that SFDR will remain a disclosure regime and will not be a labelling regime.” BLOOMBERG
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