A recent study by Clarity AI has found only 4% of sustainable investment funds would comply with US, UK and EU regulatory requirements.
The report found that regulatory regimes for sustainability disclosures and labels differ significantly across the US, UK and EU, leaving both issuers and investors confused.
When looking specifically at the EU, in November 2022 the ESMA released a consultation that sought to put minimum thresholds in place for Article 8 – or “light green” – funds that use certain ESG or sustainability-related terms in their names.
ESMA proposed that any fund using an ESG-related term in its name would need to ensure that 100% of the assets it invests in adhere to minimum safeguards by following the minimum exclusion criteria outlined in the Paris-aligned benchmark regulation, 80% of the assets it invests in are used to meet the ESG-related characteristics that it promotes and 50% of the assets it invests in are sustainable investments as defined under Article 2(17) of SFDR, if the fund uses the term “sustainable” or any derived term (e.g. “sustain”) in its name.
Clarity AI examined these proposals, drawing on data from over 18,000 funds across Europe. To test the ESMA proposals on the funds that do have references to ESG, Clarity AI looked at the planned (via European ESG Templates, or EETs) and actual (via Clarity AI’s own data) level of sustainable investment in different Article 8 funds.
The firm’s analysis found only 20% of Article 8 funds with the term sustainable (or a derivative thereof) currently plan to make sustainable investment of over 50% as outlined by the consultation. These funds would therefore fall short of the proposed amendments. In fact, the picture is bleak in terms of sustainable investment made by Article 8 funds with “sustainable” in their names: a similar number (20%) plan to make less than 10% sustainable investment. Furthermore, the proposal from ESMA does not appear to align particularly closely with either of the proposals from the UK or the US.
Clarity AI head of product research and innovation Patricia Pina said, “When looking at funds with all three investment fund regimes – the US’, UK’s, and EU’s – we found that over 95% of funds with the word “sustainable”, or similar term, would require renaming or restructuring in order to be sold across all three markets. This is not only an added cost in terms of compliance, but also underscores how different actors – in this case regulators – are interpreting the meaning of core concepts like ESG and sustainability.
“Although each jurisdiction might have contextual differences worth taking into account, capital markets are global markets and we need stronger regulatory alignment across borders. Understanding and characterizing ESG and sustainability differently will only contribute to increasing the existing confusion in the market and potentially result in ‘greenwashing,’ which is exactly what these regulations aim to fight.”
Clarity AI recently partnered with impact data and intelligence provider GIST Impact to create a biodiversity impact assessment product.
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