According to Morningstar, the EU eco-label falls short


Almost a quarter of funds that claim to “encourage” sustainability under European regulations do not deserve an ESG label, according to a new review by market researcher Morningstar.

The analysis, which looked at funds classified under Article 8 of the EU Sustainable Finance Disclosure Regulation, shows 23pc fail to meet environmental, social or governance investment principles, said Boya Wang, an ESG analyst at Morningstar, in an interview.

To justify an ESG tag within Morningstar’s definition, a fund’s investment strategy cannot rely solely on excluding so-called sin stocks such as tobacco, coal or guns, Ms Wang said. “Many Article 8 funds are not labeled as sustainable funds in our framework,” he said.

The assessment is the latest to raise questions about a key pillar of Europe’s efforts to become a global sustainability champion. No other jurisdiction has embarked on such an ambitious program to transform the entire wealth management industry. But even regulators are beginning to warn that the process has left too many opportunities for greenwashing.

The EU regulatory framework for ESG investing, SFDR, was designed to root out over-the-top sustainability claims by asset managers. The framework, enforced in March last year, requires companies to classify their investment products into one of three categories: Article 6, which only addresses ESG risks; Article 8, which “promotes” ESG characteristics; and Article 9, which sets out measurable ESG “goals”.

Arguably the most vague of the three categories, Article 8 has become a magnet for fund managers. The latest data from Morningstar shows that money managers have reclassified well over 600 funds previously listed as Article 6 to Article 8. A number of Article 9 funds have also been downgraded to Article 8, she noted. In June, Article 8-registered funds held €3.76 trillion, compared to €420 billion allocated to Article 9 funds, Morningstar estimates.

The reclassifications coincided with a crackdown by financial regulators on funds suspected of misrepresenting the ESG characteristics of their portfolios.

“There have been several signs from regulators saying, ‘We’re watching closely and will knock,'” said Sonali Siriwardena, partner and global head of ESG at Simmons & Simmons. Recent EU guidance “states very clearly that one of the likely reasons for regulatory intervention is that regular reporting does not support what is said in the product documentation”.

There are also signs that investment clients are becoming more cautious about Article 8 as fund managers add atypical ESG sectors such as defence, energy and materials to the category. More than €29.75 billion was withdrawn from Article 8 products last quarter, while about €5.95 billion went into the more stringent ESG category of Article 9, Morningstar data shows.

In response to tighter rules and more demanding clients, some wealth managers have started removing ESG labels from funds rather than being accused of greenwashing. In the second quarter, six funds dropped sustainability-related keywords from their names, according to Morningstar. According to Morningstar, the EU eco-label falls short

Fry Electronics Team

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