Around 70% of funds still do not integrate any kind of sustainability into their investment strategy and are currently classified as Article 6 under the Sustainable Finance Disclosure Regulation (SFDR), which came into effect nearly a year ago on 10 March 2021, according to MainStreet Partner’s annual ESG Barometer report.
The report surveyed the firm’s ESG database of 4,200 UCITs and exchange traded funds (ETFs), covering 160 asset managers, representing €5.6ttrillion in assets.
The report’s aim is to provide an independent appraisal of asset managers and their efforts to offer more sustainable investment solutions as well as analysis at the fund level of the ESG claims being purported.
It also looked at the most innovative and emerging trends gaining traction in the ESG space.
“It is not an exaggeration to say the SFDR was a game changer for investors,” said Neill Blanks, research director at MainStreet Partners, said While not yet perfect, SFDR provided a universal identification and disclosure framework for sustainability risks – something previously absent in the asset management industry.”
The SFDR has three main categories –Article 6 which are funds that do not include sustainable investments into the investment process and could include stocks currently excluded by ESG funds such as tobacco companies or thermal coal producers.
Article 8 covers funds that that promote E or S characteristics but do not have them as the overarching objective while Article 9 are funds that specifically do have sustainable goals as their objective such as investing in companies who seek to reduce carbon emissions.
At the moment, the former accounts for 25% while the latter only comprises 5% in the Mainstreet study but as the report notes, “We expect this situation to change over subsequent quarters in favour of Article 8 funds, as many asset managers are still in the midst of their ESG integration process and awaiting regulatory approval for Article 6 to 8 transitions.”
The report found that overall, the classification of funds under Article 8 and 9 has correlated with larger inflows into these products suggesting that investors are placing their trust in the labels.
However, it added that assessing the degree of genuine ESG integration has arguably become more difficult, given the diversity of products on show and the absence of standardisation.
Around a fifth (21%) of funds which have been classified as Article 8 have achieved a MainStreet Partners ESG Fund Rating of less than 3 out of 5, missing the threshold of 3, meaning that they would not be classified as “Sustainable” by the firm.
This does not that the funds were “categorically guilty of greenwashing”, but offered an average rating of those funds by different pillars to identify whether there were areas in which the funds were collectively lagging.
The firm’s conclusion is that issues related to strategy and portfolios was dragging down Article 8 funds’ MainStreet Partners score, and not the overall ESG capabilities and commitment from the asset manager.
The European Commission’s is hoping to address some of these issues with its renewed sustainable finance strategy document. From July, the EU executive said it would propose minimum sustainability criteria for financial products that fall under Article 8 of the SFDR, “in order to guarantee minimum sustainability performance of such products to further strengthen a harmonised application of the Regulation and incentivise transitional efforts”.
“We hope to see greater alignment between the SFDR Article labels on funds and our own ESG ratings as asset managers continue their work to transition investment processes and strategies,” said Simone Gallo, managing director of MainStreet Partners.
“Otherwise, there is a risk that accusations of greenwashing begin to gather more credence, which would be damaging for the industry as a whole, and for investors’ trust in sustainable investment approaches.”
Issues remain, Gallo added, with assessing the degree of “genuine ESG integration” in Article 8 and 9 funds due to product diversity and the absence of a single standard for ESG integrated products.
Work also needs to be done to expand the sustainability horizons. For now, the report found Not surprisingly, most funds are focusing on the E component which includes green bonds, climate and climate transition, clean tech, clean water, future mobility, food and circular economy sub-themes. They comprise 51% compared to the 7% of funds that have a social slant which can range from ageing population to education, well-being and healthcare.
One of the reasons is the “current preoccupation with net-zero targets – Article 9 environmental funds have an average of €1.3 billion in assets under management, while social funds in the same classification average € 384 million,” according to the report.
Although asset managers across the spectrum are embracing sustainability, some are farther ahead than others. The report awarded French firms BNP Paribas AM and Amundi top marks for their integration and strategy in the medium to large camp, while Impax, the London based specialist investor, and Triodos were highly rated managers at the boutique level.
As for products, the report showed that multi-asset funds tend to have both a lower degree of ESG integration in their investment objectives and are less aligned to the Sustainable Development Goals (SDGs) compared to other categories or sectors. In fact, on average, multi-asset funds score 0.6 points less than other asset classes for Article 9 funds.)
As for jurisdictions, Europe continues to be in front on sustainability disclosure, regulation and ESG integration, while the US is just starting its journey. The report noted that US-based asset managers are still trying to catch up with their European counterparts, in terms of ESG integration in the investment process, the building out of large teams and pouring capital into sustainability resources. This is mainly due to a lack of demand for ESG strategies.
©Markets Media Europe 2021
[divider_to_top]
