Global sustainable investments are estimated to range between $35tn and $40tn.
Amid mounting concern that only a fraction of such assets are bona fide “environmental, social, and governance” (ESG) investing, there are calls for tougher regulations to stamp out the false claims by fund managers.
Asset managers have dramatically reduced the number of new ESG funds they’re rolling out, as a tougher regulatory environment makes it harder to make claims of environmental, social and governance investing.
Reclassifications that add an ESG element to conventional funds are down 84% compared with a year ago, according to data compiled by Jefferies. New ESG funds built from scratch fell 60% over the same period.
Overall, the data show that the decline was most pronounced in Europe and marks the first time that reclassifying old products hasn’t led ESG fund growth.
A recent analysis by PwC showed that of 8,017 so-called Article 8 funds – an EU designation that requires a product to “promote” sustainability – only 989 were new at the end of the second quarter.
A similar analysis of 1,061 Article 9 funds – whereby a product needs to have sustainability as its “objective” – showed that only 286 were new.
In Europe, a review over the summer indicated that asset managers may have to downgrade hundreds of ESG funds in the coming months.
The European Sustainable Investment Forum, whose members represent about $20tn in combined assets, has warned that “a significant proportion classified as Article 9 are far short” of meeting EU requirements.
In Sweden, a probe of Article 9 products last month found “many cases” in which managers failed to document their claims. The Stockholm-based regulator has warned that it will act to stamp out false ESG labelling.
Companies are also increasingly trying to keep their climate pledges away from public scrutiny.
The phenomenon, known as green hushing, has become pervasive even as businesses set more ambitious internal targets, according to a survey by South Pole, a climate consultancy and carbon offsets developer.
The UK’s financial regulator made clear it will no longer tolerate vague ESG fund designations as it moves to crack down on investment managers that can’t back up their claims of targeting environmental, social and governance metrics.
Fund managers operating in the UK will face a “package of new measures, including investment product sustainability labels and restrictions on how terms like ‘ESG,’ ‘green’ or ‘sustainable’ can be used,” the Financial Conduct Authority said in a recent statement.
It’s the latest example of regulators tightening the screws around ESG investing, which after years of unfettered growth now accounts for roughly a third of global assets.
Regulators in the EU, US, UK and Japan are stepping up oversight of ESG funds amid growing concerns that asset managers keen to sell products are promising more than they can deliver.
Fund clients have been calling for better guardrails on the ESG industry, with an analysis by PwC showing that 71% of institutional investors want stronger ESG regulations.
The hope is that extra rules “can act as an important lever to build trust and decrease the risk of mislabelling,” according to PwC.
For sure, there are some ways to check on the ESG claims.
The European Union has proposed a European Green Bond Standard, which could be applied to other types of ethical debt such as sustainability-linked issues or social financing.
Third-party rating companies can also provide some assurance that green bonds are doing what they say they are.
All of this detective work would be easier with a standardised approach and robust set of data to compare.
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