IPE revealed this week that Allianz Global Investors was changing the investment strategy of a number of its sustainability-labelled funds.
The decision comes in response to new guidance from the European Securities and Markets Authority (ESMA), which seeks to stop funds from using ESG-related terms in their names in ways that could mislead investors.
Specifically, ESMA has asked the European Union’s national regulators to monitor the use of words associated with the following themes: Transition, Environment, Social, Governance, Impact and Sustainability.
A fund with a title that implies it supports any of those six ambitions must invest at least 80% of its assets in alignment with expectations laid out in the EU’s Sustainable Finance Disclosure Regulation (SFDR).
It must also adopt blanket environmental and social exclusions, which vary in ambition depending on the word used.
The guidance is already in place for new funds, but ESMA has given existing products until 21 May to comply.
While asset managers like Allianz are choosing to revise their investment policies to stay on the right side of the rules, others, such as AXA Investment Management, are simply changing their funds’ names.
Morningstar research published last week found 115 European funds had already dropped ESG-related terms –mostly ‘sustainable’ or ‘sustainability’ – from their names, during 2024.
Over the same period, just 50 added those terms.
The UK’s new sustainable fund labelling regime was one reason for the trend, but ESMA’s guidelines are another, Morningstar said, and one that will accelerate over the coming months.
The data provider estimates that up to a half of EU-marketed funds using relevant words will ditch them before the May deadline.
Funds with names like ‘ESG screened’ or ‘ESG filtered’ will become simply ‘screened’ and ‘filtered’, the analysis predicts.
“It will transform the whole landscape in just a few months,” says Hortense Bioy, Morningstar’s head of sustainable investing research.
“Overall, we estimate that between 30% and 50% of ESG funds, representing between 1,200 and 2,200 funds, could see name changes, with term removals, additions, and potential mergers anticipated for smaller and underperforming funds,” she explains.
A new SFDR?
ESMA’s guidance was intended to give national authorities a steer on how to enforce SFDR, given that the regulation itself does not provide any clear definitions or thresholds against which to assess greenwashing.
But things have changed since then, and SFDR is in the process of being redesigned to address this problem directly.
In December the European Commission’s advisory body, the Platform on Sustainable Finance (PSF), outlined a proposal for transforming the law into a labelling regime with three categories: ‘sustainable’, ‘transition’ and ‘ESG collection’.
If an asset manager wants a fund to belong in one of these buckets, it would have to align with a much clearer set of expectations, laid out in the proposals, including the use of the EU Taxonomy and varying levels of exclusions.
In addition, PSF wants to level the playing field for funds in Europe, rather than penalising sustainability-related products. At the moment, conventional funds do not have to do much to comply with SFDR, so they are spared most of the costs and compliance risks generated by the regulation.
To restore balance, the proposals suggest that every fund marketed in the EU should have to provide information on key topics like human rights policies and carbon intensity, regardless of whether it makes ESG-related claims.
Heike Schmitz, a partner at law firm Herbert Smith Freehills who specialises in sustainable finance, says PSF’s proposed categories align in many ways with ESMA’s guidelines.
For example, both call for exclusion policies for qualifying funds, based on what is already in the EU’s climate benchmarks regulation.
However, Schmitz says, funds that assign themselves to the SFDR’s most ambitious category, ‘Article 9’, may have to make do with calling themselves ‘transition’ products under the new proposals, because the ‘sustainable’ category is stricter than the current Article 9 concept.
It requires eligible activities to be fully aligned with the EU Taxonomy, for instance, meaning they have to be an official ‘green’ activity and then survive ‘do no significant harm’ (DNSH) and minimum social safeguard screens.
“I’d guess that a lot of Article 9 funds will struggle with the new criteria, if it is approved,” says Schmitz. “So we may see another reshuffle.”
The Commission will need to respond to the Platform’s recommendations with its own proposal, accompanied by a public consultation and then potentially years of political negotiations.
Given the high-profile efforts to cull EU disclosure rules at the moment, with the Corporate Sustainability Reporting Directive and Taxonomy Regulation both on the chopping block, it is possible the Commission will avoid any overhaul of SFDR that will see it put back through political negotiations.
Too much change?
Morningstar’s Bioy argues that revising the technical criteria, rather than the legal fundamentals, may be enough to make the regulation more effective.
“The primary objective of all this is to channel capital into activities that make Europe more sustainable,” she says, adding that investors needed protection from the greenwashing that ensued as a result of that agenda.
SFDR and ESMA’s guidelines serve to address those two goals.
“Now you have this third objective, which is to simplify all these rules. But that should be done using what’s there, not by adding more or totally changing it,” says Bioy.
“You have what you need already, just simplify it.”
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Topics
- Allianz Global Investors
- Asset Managers
- AXA Investment Management (AXA IM)
- Climate change
- Corporate governance
- Corporate Sustainability Reporting Directive (CSRD)
- ESG
- EU Taxonomy
- European Securities and Markets Authority (ESMA)
- greenwashing
- Impact investing
- Markets
- Platform on Sustainable Finance (PSF)
- reporting
- Sustainability
- Sustainable Finance Disclosures Regulation (SFDR)
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