Fund managers are preparing for an ESG correction with $4 trillion at stake

Asset managers are trying to digest new regulatory proposals that have the potential to upend Europe’s largest ESG fund category.

Plan by Europe’s market regulator, the European Securities and Markets Authority (ESMA), to set quantifiable standards for ESG and responsible investing is forcing portfolio managers to reconsider how they design and market an ESG fund class known as Article 8.

Morningstar Inc. estimates that just 18 percent of Article 8 funds, which hold approximately $4 trillion in assets, currently meet the regulator’s proposed sustainable investment threshold.

There’s “an air of realism” blowing through the investment industry as managers digest the risks of mislabeling ESG, said Matt Townsend, a partner at Allen & Overy in London.

According to analysts at Jefferies International Ltd. this is the latest in a wave of regulatory updates that are causing turmoil and a sense of “mass frustration” among fund managers struggling to keep up. There has already been a cycle of downgrades of the EU’s highest ESG class Article 9 to Article 8 after the EU clarified its rules. However, the downgrading of Article 8 funds means the loss of the right to market a product as ESG or sustainable.

Linklaters investment fund partner Martin Mager said asset managers cannot afford to downgrade from Article 8 if they want to retain ESG clients. “Managers realize they need it to do their marketing,” he said.

European regulators have made it clear that they are determined to set much stricter standards for what fund managers can call sustainable. As part of this process, they continually update the EU’s anti-greenwash regime, the Sustainable Finance Disclosure Regulation.

Article 9 funds must target an ESG objective. Article 8 products must “promote” ESG characteristics. It’s a broad requirement that has led to confusion and even accusations of greenwashing.

ESMA now proposes that a fund with ESG-related words in its name hold at least 80% of its holdings in investments that match the strategy description. Funds with sustainability-related words in their names face an additional requirement of having at least 40 percent of assets that meet the SFRD definition of a sustainable asset.

ESMA wants to provide “clear and measurable criteria for evaluating fund names,” ESMA Chair Verena Ross said last month.

https://www.independent.ie/business/irish/fund-managers-brace-for-esg-correction-with-4trn-at-stake-42212267.html Fund managers are preparing for an ESG correction with $4 trillion at stake

Fry Electronics Team

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