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Many 'dark green' sustainable funds may not be investing in enough sustainable investments

Around a quarter of the most supposedly ‘dark green’ sustainable funds in Europe are in danger of being stripped of their environmental, social and governance (ESG) regulatory designation due to potential greenwashing.

Digging into the ESG templates for the 6,000 funds with the EU’s ‘Article 9’ status, researchers at FE Fundinfo said that “at least 1,500” funds potentially have not invested in anywhere near enough sustainable investments.

As the EU’s Sustainable Finance Disclosure Regulation (SFDR) states that an Article 9 fund must have “sustainable investment as its objective or a reduction in carbon emissions as its objective,” or contribute to an environmental or social objective, “provided that such investments do not significantly harm any of those objectives and that the investee companies follow good governance practices”.

This has been interpreted to mean that impact funds, as by definition they contribute to having an impact on environmental or social objectives, should be classified as Article 9.In June this year, the EU financial regulators reminded fund groups that Article 9 products “may invest in a wide range of underlying assets, provided these underlying assets qualify as ‘sustainable investments’.”

The blunt conclusion was that, “for the avoidance of doubt… financial products that have sustainable investment as an objective [ie Article 9 products] should only make sustainable investments”.

Of the 6,000 Article 9 funds and share classes, 79 have set their minimum investment in sustainable investments at 100% and another 168 funds set a minimum of 90% in their European ESG Templates (EETs) data, which have been submitted to FE and other market participants across the EEA ahead of the SFDR taking effect on 1 January 2023.

The vast majority of Article 9 funds have left this field on the EET blank so far, FE Fundinfo said.

What’s more, 663 funds and share classes have set a minimum level of 0% (zero) sustainable investments, and another 780 have a minimum of between 0.1% and 85% in sustainable investments.

“Even if it is assumed that all of those Article 9 funds with no stated minimum in sustainable investments will end up with close to 100% when they update their prospectus and populate the field, that still means that at least 1,500 funds might need to review their Article 9 status,” FE said.

“It will be interesting to see which way this goes – will article 9 funds tighten up their investment criteria or will groups start to reclassify their funds as Article 8, which have no minimum requirement for sustainable investment?”

US regulator, the Securities and Exchange Commissio (SEC) has also gone after asset managers for greenwashing, saying that companies should not be allowed to label funds ‘ESG’ or ‘sustainable’ as part of their name or marketing if “ESG inputs are merely one factor among many driving an investment decision, as this could mislead investors”.

In May, the SEC, which has also this year fined one firm (BNY Mellon) for making misleading statements about its ESG processes and is investigating another (Goldman Sachs), proposed an update to the “names rule” that governs fund titles, calling for fund names that suggest particular strategies to adopt policies for investing at least 80% of assets along the lines of those strategies suggested in the fund name.

Examples offered were funds with terms such as ‘green’ or ‘carbon-neutral’ or ‘environmental’ in their names.