Fifty Shades of Green: EU rules on sustainable funds muddy the waters | The powerful 790 KFGO

By Tommy Wilkes

LONDON (Reuters) – If you want to invest in a fund that qualifies as sustainable under the new European Union rules, you are spoiled for choice. But you could end up owning stocks in oil companies, mining conglomerates, or tobacco companies.

A Reuters analysis of funds marketed to increasingly greedy retail investors shows that asset managers are adopting a wide range of strategies to justify the sustainable label since the EU introduced disclosure rules in March.

The EU’s Public Financial Disclosure Regulation (SFDR) is an attempt to provide transparency to investors focused on environmental, social and governance (ESG) issues, but fund managers say the definition of the durability is too vague and has created confusion over what makes the cut.

Take the Allianz Global Water fund.

It actively invests in companies that improve the supply, management and quality of water and is marketed as falling under Article 8 of the SFDR, which means that it is a fund that promotes “ among other characteristics, environmental or social characteristics, or a combination thereof. characteristics”.

Now take one of Legal & General Investment Management (LGIM) Article 8 Exchange Traded Funds (ETFs).

The L&G UK Equity UCITS ETF tracks the Solactive Core United Kingdom Large & Mid Cap Index, which excludes coal miners and companies that manufacture weapons such as cluster bombs or have violated UN principles https: // gc / mission / principles on corporate values.

Its top 10 holdings are the same as for L&G funds following the FTSE 100 index which do not carry the Article 8 label and include oil giants BP and Royal Dutch Shell, miner Rio Tinto and British American Tobacco.

L&G said the fund was considered Article 8 because it promotes sustainability characteristics by applying LGIM’s Future World Protection List and it is a “binding element” of the investment process.

“The lens we should be using is what’s right. It’s not just about what is legally required, as it seems that little is legally required, ”said Eric Christian Pedersen, responsible investment manager at Nordea Asset Management.


The new EU rules have sparked a rush of investment firms to label products as sustainable as they seek to seize a share of the booming sustainable mutual fund market which has reached a record 2, $ 3 trillion in the second quarter.

From March 10, the rules automatically placed all investment funds in an article 6 combination category. Managers could then move them to article 8, or article 9, which concerns products with an explicit objective of sustainable investment.

The investment industry has dubbed Article 8 funds “light green” and Article 9 “dark green”, although EU regulations do not use these terms.

A spokesperson for the European Commission said its rules were designed to ensure that funds were transparent about product sustainability so that investors could make choices, and that it was not a system of labeling.

Reuters asked 20 of the largest fund companies for a list of the products they market as Article 8 or 9.

An analysis of the funds of the 14 responding companies shows that some Article 8 products have limited claims to sustainability, such as those that track conventional stock and bond indices, invest in fossil fuels, or buy country debt. to low ESG standards like Saudi Arabia and Nigeria.

Some claims are based on funds excluding securities that they would not have purchased anyway, based on the index being tracked.

For some in the industry, this represents what’s called greenwashing, where the benefits of a business or asset are overstated to attract environmentally conscious investors.

Hortense Bioy, director of sustainability research at Morningstar, said Article 8 funds ranged from climate-themed green to “very, very light green,” to the exclusion of a few companies.

“Managers need to ask themselves if they are even relevant,” she said. “This is the key message: investors should not expect anything from Article 8.”


Industry experts say none of the asset managers are breaking the rules. The managers themselves determine which article to apply and Brussels does not check whether the complaints are justified.

Reuters analysis shows that some managers are more likely to qualify funds as sustainable than others.

Two of Europe’s largest companies, Alliance Bernstein and AXA Investment Management, rank nine out of 10 euros of assets they manage within the scope of the SFDR as Article 8 or 9, depending on the data they provided to Reuters.

Others, like Pictet Asset Management and Allianz Global Investors, place just over half of their affected assets in these categories, according to their data.

Morningstar data released in July shows that one-third of SFDR assets are now billed as item 8 or 9, with item 6 products disappearing from recommendation lists sent by investment advisers to retail investors .

Many Article 8 funds have clear sustainability criteria, such as strategies that invest in companies with the lowest carbon impact in their sectors, or Allianz’s water-focused fund.

For others, this is not always the case. Another Article 8 product is Candriam’s Cleome Europe Equities Index. It tracks the MSCI Europe Index but excludes companies that do not adhere to UN principles.

Critics say these exclusions are very limited.

When asked for an example, Candriam did not point out any companies excluded from the United Nations list that are also part of MSCI Europe. The 10 main holdings of the Candriam fund track the index.

A Candriam spokesperson said it also applies exclusions to companies materially involved in controversial weapons, tobacco and thermal coal, and that the Cleome equity fund uses proprietary ESG analysis against the index. of reference, justifying article 8.

Morningstar analysis shows that one in four Article 8 funds are exposed to companies involved in controversial weapons and one in five to tobacco. One-third of Article 8 and 9 funds have more than 5% exposure to fossil fuel companies.


The demand for funds with a sustainable label is booming.

“There is a clear business opportunity,” said Eric Borremans, ESG manager at Swiss company Pictet Asset Management, which classifies 57% of its assets in Article 8 or 9.

Borremans said Pictet does not have Article 8 index funds, but plans to apply the label to some after incorporating more exclusions.

U.S. investment giant BlackRock told Reuters it expects to exceed the target of 70% of its new or renamed products this year under Articles 8 or 9.

Some funds use ESG thresholds to justify sustainable labels.

JPMorgan Asset Management claims that 51% of securities in its Article 8 lineup should have an ESG score in the top 80%. These are scores that fund companies or third-party providers give to companies based on ESG metrics such as carbon use, governance or human rights in supply chains.

Critics say these thresholds are too low.

“You have funds that say most of our holdings are not bad and therefore I am ESG,” said Pedersen at Nordea, which requires 100% of its Article 8 holdings to be above ” a minimum ESG score.

JPMorgan’s threshold, for example, also means that 49% of the companies in its funds could rank in the lowest 20% for ESG goals, although the funds exclude sectors such as tobacco, controversial weapons and retailers. coal miners.

JPMorgan Asset Management did not respond to questions about ESG scores. A spokesperson said the cabinet remained “focused on a thoughtful and thorough approach to the implementation of the SFDR.”

Pictet’s Borremans said funds that loosely interpret the rules now may get away with it, but strategies sailing close to the wind will eventually be exposed.

By next year, the EU will expand its taxonomy – a list of environmentally sustainable economic activities – and from July 2022 funds will need to detail how they meet sustainability criteria based on technical standards. EU regulations (RTS) that will clarify disclosure requirements.

“It could damage an asset manager’s reputation for offering financial products falling under Articles 8 and 9 or aligned with taxonomy if this cannot be sustained later when the RTS comes into effect”, said the European Commission spokesperson said in comments sent by email.

Amundi’s cross-border product manager Florian Schneider said the SFDR rules made it clear that products with minimum exclusions were Article 8.

“The danger is that everyone is blindly assuming that all Article 8 funds offer the same level of ESG integration when there are very different shades of green.”

($ 1 = 0.7274 pounds)

(Additional report by Simon Jessop; Editing by Sujata Rao, Alexander Smith and David Clarke)

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