European ESG Assets Shrank by $2 Trillion After Greenwash Rules

The European market for sustainable investments contracted by $2 trillion between 2018 and 2020 following the introduction of anti-greenwashing rules, according to data from the Global Sustainable Investment Alliance.

Sustainable investment assets fell to $12 trillion in Europe during 2020 from $14 trillion in 2018, the report states. The decline isn’t the result of dampened investor enthusiasm for ESG investments, it’s because policy makers have tightened the parameters for what can be considered a responsible investment, said Simon O’Connor, chair of the GSIA.

European ESG Assets Shrank by $2 Trillion After Greenwash Rules

Europe has led the global charge into ESG investments and its banks and fund managers are most advanced in calculating the impacts of their operations on climate change and biodiversity. The bloc’s politicians also have embraced sustainability by developing the world’s most ambitious climate strategy and a suite of new rules to bring the world of finance in line with its carbon neutrality target.

The EU’s anti-greenwashing rules known as the Sustainable Finance Disclosure Regulation, or SFDR, were introduced in March and require fund managers to evaluate and disclose the environmental, social and corporate governance features of their financial products. They require fund managers to classify funds, with Article 8 funds defined as those that actively promote environmental or social characteristics, while Article 9 funds have sustainable investment as their objective, with both categories subject to higher standards of disclosure under the SFDR.

The SFDR “has effectively reset the bar as to what can be called sustainable investment, referring to only a subset of what used to be included,” O’Connor said. “Without these changes, we would anticipate that assets under management in the EU would be much higher and remain higher than the U.S.”

GSIA’s report showed sustainable investment assets in the U.S. increased to $17 trillion last year from $12 trillion two years earlier. Canada recorded the largest proportional gain in ESG assets between 2018 and 2020, with a 42% jump to $2.4 trillion.

The sustainable investment industry grew 15% in the two-year period to $35.3 trillion, and now accounts for 36% of all professionally managed assets across the U.S., Canada, Japan, Australasia and Europe, GSIA said.

ESG assets are on track to grow globally to more than $53 trillion by 2025, according to analysts at Bloomberg Intelligence.

©2021 Bloomberg L.P.

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