EU Asset Managers Face Minimum Standards for ESG Funds
(Bloomberg) -- The European Commission is planning to introduce minimum standards for so-called light green funds in an effort to rein in asset managers and prevent greenwashing.
As soon as Europe’s landmark rule book for the investment industry -- the Sustainable Finance Disclosure Regulation -- is “fully in place,” the intention is to fine-tune it and create a common starting point, Elodie Feller, sustainable finance policy officer at the commission, said Wednesday at a digital conference held by Principles for Responsible Investment.
“The commission will want to propose minimum sustainability criteria, or a combination of criteria, for financial products that fall under Article 8 of the SFDR,” Feller said, referring to a sub-clause of the regulation used to define funds that promote environmental and social causes. The goal is “to create a baseline for sustainability performance when sustainability claims are being made.”
After years of unchecked ESG claims, the fund management industry faces a much tougher regulatory environment as authorities try to eradicate greenwashing. Implemented in March, SFDR was designed to help protect investors from overblown or false claims of environmental and social benefits by requiring asset managers to document their ESG figures.
“We see a lot of confusion in the market,” Feller said. “It’s very much a transparency tool to substantiate a sustainability claims and protect investors with the substance of what is in these products.”
Asset managers are likely to welcome further clarification, though the impact won’t be felt immediately, according to Mandeep Jagpal, an analyst at RBC Capital Markets in London.
“Asset managers are keen to ensure they are meeting any regulator’s minimum standards under the new rules, to mitigate the risk of being accused of greenwashing,” Jagpal said by email. “The current SFDR framework, although an important step forward, is still open to a degree of interpretation, and we therefore expect variability in implementing SFDR compliance across firms.”
European supervisors are due to review SFDR next year to determine whether more guidance is necessary regarding the ESG marketing material that asset managers use. That’s amid continued confusion over what constitutes a light green (Article 8) or dark green (Article 9) asset under the regulation. The shade of green reflects how ESG-friendly an investment product is.
There is a “general sentiment that we will need to go one step further in defining what an Article 8 and Article 9 fund is,” Marc-Andre Bechet, deputy director general of the Association of the Luxembourg Fund Industry, said earlier this month in an interview, referring to the two ESG-focused investment fund categories under SFDR.
Bechet said his organization would prefer the EU Commission find some other way to address marketing, rather than rewriting SFDR, because the “framework is already so complex to digest, you need stability to really roll out what is coming out in the next two, three years.”
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