BRUSSELS: The correction that’s upended Europe’s environmental, social and governance (ESG) fund market since the middle of last year has yet to fully play out as the industry reacts to the risk of greenwashing allegations, says Mairead McGuinness.
“That is self-correcting, which is a good thing,” the European Union’s (EU) commissioner for financial markets and services, said in an interview here.
“And I think you are going to see more of that.”
McGuinness spoke as the fund industry braces for a regulatory review to monitor its compliance with the vast array of ESG rules unveiled in recent years.
Fund managers say the mass reclassifications – with the EU’s top ESG tag stripped from ？200bil (US$225bil or RM1.03 trillion) of client assets in the three quarters through March – were triggered by confusing European rules.
The EU’s landmark ESG investing rulebook, the sustainable finance disclosure regulation (SFDR), is due to be reviewed later this year, after both investors and local regulators said it contains too many gaps that allow for significant deviations in interpretation.A recent MSCI analysis found that the “overwhelming majority” of funds registered under SFDR’s two ESG product categories – articles eight and nine – had no stated target for alignment with the EU’s taxonomy regulation, which is the bloc’s list of sustainable activities. MSCI blamed a lack of disclosures from the companies in which funds invest.
“How can funds accurately convey their sustainable nature leveraging the EU taxonomy without the necessary bedrock of company disclosures?” MSCI analysts including Rumi Mahmood wrote.
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“The short answer is that, right now, they cannot.”At the same time, the EU is cracking down on ESG ratings and working on a formal definition of greenwashing in an effort to tidy up the industry.
Investment managers are now waiting to find out how tough the coming regulatory crackdown will be.
McGuinness characterised the scale of the EU’s ESG ambitions as “almost a revolution,” as companies and investors are urged to prioritise other goals besides profits. — Bloomberg