Analysis conducted by sustainability tech platform Clarity AI, of more than 18,000 investment funds across Europe found that less than 4% would be able to comply with naming laws for ESG funds across key markets.
The report found that regulatory regimes for sustainability disclosures and labels differ significantly across the US, UK and EU, leaving both issuers and investors confused.
“When looking at funds with all three investment fund regimes – the US’, UK’s, and EU’s – we found that over 95% of funds with the word ‘sustainable’, or similar term, would require renaming or restructuring in order to be sold across all three markets. This is not only an added cost in terms of compliance but also underscores how different actors – in this case, regulators – are interpreting the meaning of core concepts like ESG and sustainability.” said Patricia Pina, head of product research and innovation at Clarity AI.
When looking specifically at the EU, in November 2022 the European Securities and Markets Authority (ESMA) released a consultation that sought to put minimum thresholds in place for Article 8 – or “light green” – funds that use certain ESG or sustainability-related terms in their names. ESMA proposed that any fund using an ESG-related term in its name would need to ensure that:
- 100% of the assets it invests in adhere to minimum safeguards by following the minimum exclusion criteria outlined in the Paris-aligned benchmark regulation.
- 80% of the assets it invests in are used to meet the ESG-related characteristics that it promotes (i.e. aligned with the terms in the name).
- 50% of the assets it invests in are sustainable investments as defined under Article 2 of SFDR if the fund uses the term “sustainable” or any derived term (e.g. “sustain”) in its name.
To test the ESMA proposals on the funds that do have references to ESG, Clarity AI looked at the planned (via European ESG Templates, or EETs) and actual (via Clarity AI’s own data) level of sustainable investment in different Article 8 funds. Clarity AI’s analysis found only 20% of Article 8 funds with the term sustainable currently plan to make sustainable investments of over 50% as outlined by the consultation, thus falling short of the proposed amendments. Furthermore, the proposal from ESMA does not appear to align particularly closely with either of the proposals from the UK or the US.
“Although each jurisdiction might have contextual differences worth taking into account, capital markets are global markets and we need stronger regulatory alignment across borders. Understanding and characterising ESG and sustainability differently will only contribute to increasing the existing confusion in the market and potentially result in ‘greenwashing,’ which is exactly what these regulations aim to fight, ” added Pina.
About Clarity AI
Clarity AI is a sustainability technology platform that uses machine learning and big data to deliver environmental and social insights to investors, organisations, and consumers. Clarity AI’s capabilities are used for end-to-end sustainability analysis related to investing, corporate research, benchmarking, consumer e-commerce, and regulatory reporting.
As of May 2023, Clarity AI’s platform analyses more than 70,000 companies, 390,000 funds, 198 countries, and 199 local governments. Clarity AI has offices in North America, Europe, and the Middle East, and its client network manages tens of trillions in assets and includes companies like Invesco, Nordea, BlackRock, Santander, Wellington, and BNP Paribas.
