A large majority of sustainable funds do not meet the minimum criteria required for the European Union’s proposed ‘Ecolabel’ – the European Securities and Markets Authority (ESMA) has warned.
The analysis, which looked at 3,000 ESG-focused funds with over €1trn (£886bn) in assets, found that just 16 (0.5%) of them met the portfolio greenness threshold of 50% as well as certain exclusionary criteria.
The “Ecolabel” is a voluntary EU-wide label awarded to green products and services. Since 1992 it has become a reference point for consumers who want to help reduce pollution by purchasing more environmentally friendly products and services. A new version of the label has been considered for retail financial products as an option to help investors make similarly informed decisions on the sustainability features of investment products.
“The EU Ecolabel for retail financial products could bring benefits to investors by introducing minimum sustainability criteria based on standardised definitions and increasing transparency”, said a spokesperson from the ESMA.
However, under the current iteration of the rule, only a minuscule number of assets would qualify for the label if introduced.
The label requires compliance with several criteria, including a combination of minimum ‘greenness’ threshold, which is measured by alignment with the EU Taxonomy and specific exclusion requirements.
In the report, the ESMA found 26 funds (just 1%) out of the 3,000 sample – had a portfolio greenness ratio above 50%.
On the other exclusionary requirement, the regulator revealed 73% of funds had at least some exposure to fossil fuels, meaning they would not qualify for an ecolabel.
When combining the portfolio greenness ratio along with ESG exclusions, just 16 funds met the requirements of the Ecolabel.
The ESMA said relaxing the 50% greenness requirement, which it said is high compared to green fund labels that already exist in some EU countries, would boost numbers significantly. According to the survey, 69 funds would meet a 40% threshold and 136 funds would meet a 30% threshold.
The industry body said less stringent requirements would draw in more investment into a low-carbon economy in the future, however, may also reduce the credibility of the label.
“Looser requirements should lead to a higher offering of Ecolabel products, which may draw in a larger number of investors and volumes of financing, provided that such actions do not damage the credibility of the Ecolabel,” it added.
The report comes as the asset management industry struggles to get to grips with the ‘level 2’ of SFDR, which introduces new measures under the Disclosures Regulation and came into effect on 1 January.
Roughly €50bn (£44bn) of ETFs have downgraded from Article 9 to Article 8 in recent months as issuers such as BlackRock and DWS look to bring their products in line with the updated regulation.
In November, ESMA launched a consultation to introduce a minimum threshold of 50% sustainable investments for funds using their ‘sustainable’ in their name and an 80% threshold for funds using ESG.
The full report can be found here.
