European asset managers blame regulatory confusion for downgrade of ESG funds

Europe’s top asset managers are downgrading ESG funds holding tens of billions of dollars of client money that had been badged at the highest level of sustainability but which have come under increasing regulatory scrutiny.

The asset managers say that confusion over new EU sustainability rules has forced the changes, arguing that guidance issued by European officials over the summer has failed to provide the industry with a clear definition of sustainability.

The downgrades come as the environmental, social and governance sector faces growing criticism and accusations of greenwashing, which have prompted investigations by regulators and law enforcement in the US and Germany.

Amundi, BlackRock, Axa, Invesco, NN Investment Partners, Pimco, Neuberger Berman, Robeco and Deka are among the investment companies that have decided to reclassify some of their Article 9 funds — the highest sustainability designation under Europe’s Sustainable Finance Disclosure Regulation (SFDR) rubric — to the broader, and less demanding, Article 8 category.

Amundi has said it will reclassify the vast majority of the €45bn worth of strategies it now holds in Article 9 funds, following a European Commission intervention over the summer that set a higher bar for “dark green” funds.

“The regulation is not bringing enough clarity in terms of definition . . . which creates strong discrepancies in the market while leaving plenty of grey areas,” said Elodie Laugel, head of responsible investing at Amundi. “Our responsibility is to protect clients [so] with such uncertainty and evolving regulation, we’ve decided to take a very cautious approach.”

BlackRock, one of the world’s biggest fund managers, decided to downgrade a number of passive funds covering $27.7bn in assets under management two weeks ago, while Invesco has downgraded five Paris-aligned passive funds.

Netherlands-based NN Investment Partners, which is owned by Goldman Sachs, was among the first to announce its decision to re-label some Article 9 funds midway through the year, with plans to downgrade as many as 20 strategies in total by the end of the financial year, according to data provider Morningstar.

Axa has already downgraded more than 20 strategies, but says it will affect about 50 in total in the near future. “We would have liked a clearer definition of what is a sustainable fund . . . because now there are as many definitions as there are asset managers, said Clémence Humeau, head of sustainability co-ordination and governance at Axa.

“In an ideal world we would have preferred this to have happened a year ago, but it is happening now,” Humeau added, noting that the commission is aware of the challenges and working with the industry to provide more clarity.

There were more than 1,000 funds, representing 4.3 per cent of all products distributed in Europe, classified as Article 9 as of the end of September, though this number is expected to fall significantly over the next half-year, Morningstar said.

The commission’s July guidance raised the bar to qualify as an Article 9 product by saying these funds must not only prioritise making environmental, social and governance impacts, but that all issuers included in the funds must already be considered sustainable. The change eliminated all so-called transition investments — which aim to finance organisations that have set sustainability objectives but have not achieved them yet — from the category.

Under 5 per cent of Article 9-badged funds currently target sustainable investment exposures of between 90 and 100 per cent. And only 26 per cent have already achieved a 100 per cent allocation, “raising questions about the feasibility of some new regulatory guidance”, Morningstar noted.

At the same time, the commission has not provided the industry with a working definition of what qualifies as sustainable. “For sure there is some frustration there . . . This gives the impression that the industry classified [funds] inappropriately before, when this is not the case because the rules have changed,” Laugel said, adding that Amundi’s strategies could be moved up the rubric again once there is further clarity from EU officials.

Global flows into ESG strategies slowed in the third quarter of 2022, while total assets managed in these strategies slipped 1.6 per cent to $2.24tn amid turbulent markets. Almost all new investment flowed into funds in Europe, which still dominates the sector by a wide margin.

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