European asset managers blame regulatory confusion for downgrade of ESG funds

Europe’s high asset managers are downgrading ESG funds holding tens of billions of {dollars} of consumer cash that had been badged on the highest degree of sustainability however which have come underneath growing regulatory scrutiny.

The asset managers say that confusion over new EU sustainability guidelines has compelled the adjustments, arguing that steering issued by European officers over the summer time has failed to supply the trade with a transparent definition of sustainability.

The downgrades come because the environmental, social and governance sector faces rising criticism and accusations of greenwashing, which have prompted investigations by regulators and regulation enforcement within the US and Germany.

Amundi, BlackRock, Axa, Invesco, NN Funding Companions, Pimco, Neuberger Berman, Robeco and Deka are among the many funding firms which have determined to reclassify a few of their Article 9 funds — the best sustainability designation underneath Europe’s Sustainable Finance Disclosure Regulation (SFDR) rubric — to the broader, and fewer demanding, Article 8 class.

Amundi has mentioned it is going to reclassify the overwhelming majority of the €45bn price of methods it now holds in Article 9 funds, following a European Fee intervention over the summer time that set the next bar for “darkish inexperienced” funds.

“The regulation shouldn’t be bringing sufficient readability by way of definition . . . which creates sturdy discrepancies available in the market whereas leaving loads of gray areas,” mentioned Elodie Laugel, head of accountable investing at Amundi. “Our duty is to guard purchasers [so] with such uncertainty and evolving regulation, we’ve determined to take a really cautious method.”

BlackRock, one of many world’s largest fund managers, determined to downgrade quite a lot of passive funds protecting $27.7bn in property underneath administration two weeks in the past, whereas Invesco has downgraded 5 Paris-aligned passive funds.

Netherlands-based NN Funding Companions, which is owned by Goldman Sachs, was among the many first to announce its choice to re-label some Article 9 funds halfway by the 12 months, with plans to downgrade as many as 20 methods in whole by the top of the monetary 12 months, based on knowledge supplier Morningstar.

Axa has already downgraded greater than 20 methods, however says it is going to have an effect on about 50 in whole within the close to future. “We might have appreciated a clearer definition of what’s a sustainable fund . . . as a result of now there are as many definitions as there are asset managers, mentioned Clémence Humeau, head of sustainability co-ordination and governance at Axa.

“In a perfect world we might have most popular this to have occurred a 12 months in the past, however it’s occurring now,” Humeau added, noting that the fee is conscious of the challenges and dealing with the trade to supply extra readability.

There have been greater than 1,000 funds, representing 4.3 per cent of all merchandise distributed in Europe, categorised as Article 9 as of the top of September, although this quantity is anticipated to fall considerably over the following half-year, Morningstar mentioned.

The fee’s July steering raised the bar to qualify as an Article 9 product by saying these funds should not solely prioritise making environmental, social and governance impacts, however that every one issuers included within the funds should already be thought of sustainable. The change eradicated all so-called transition investments — which goal to finance organisations which have set sustainability aims however haven’t achieved them but — from the class.

Beneath 5 per cent of Article 9-badged funds at present goal sustainable funding exposures of between 90 and 100 per cent. And solely 26 per cent have already achieved a 100 per cent allocation, “elevating questions concerning the feasibility of some new regulatory steering”, Morningstar famous.

On the identical time, the fee has not supplied the trade with a working definition of what qualifies as sustainable. “For positive there may be some frustration there . . . This gives the look that the trade categorised [funds] inappropriately earlier than, when this isn’t the case as a result of the principles have modified,” Laugel mentioned, including that Amundi’s methods could possibly be moved up the rubric once more as soon as there may be additional readability from EU officers.

World flows into ESG methods slowed within the third quarter of 2022, whereas whole property managed in these methods slipped 1.6 per cent to $2.24tn amid turbulent markets. Virtually all new funding flowed into funds in Europe, which nonetheless dominates the sector by a large margin.