Only 20% of funds would comply with ESMA ESG proposal

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Eighty percent of Article 8 funds would fail to comply with the European Securities and Markets Authority’s (Esma) proposed fund labelling regulation, according to a new report by Clarity AI.

The sustainability tech platform, which analysed 18,000 funds, found that only 20% of  Sustainability Finance Disclosure Regulation’s Article 8 funds, with the term sustainable currently plan to make sustainable investments of over 50%.

In November, Esma proposed the introduction of minimum quantitative thresholds for any fund using an environment, social and governance (ESG)-related term in their name.

The guidelines would require any Article 8 funds that use ESG or sustainability-related terms in their name to invest at least 50% of assets into sustainable investments.

Clarity AI also looked at fund requirements across geographies, finding “limited alignment” between them.

“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 a similar term, would require renaming or restructuring in order to be sold across all three markets,’ said Patricia Pina, head of product research and innovation at Clarity AI.

She added, “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.”

Clarity AI noted that 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.”

“Clarity AI’s report shines a glaring spotlight on how many funds are unprepared as regulators plan to ramp up requirements around ESG labelling,” said Yann Bloch, head of product and pre-sales Americas at NeoXam.

He added, “What’s more, the divergence between regulatory regimes adds another hurdle in the race to keep up with requirements.”

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