Axing the EU’s ESG investing rules would be a mistake, the head of EU policy at the UN PRI has warned.
The future of the bloc’s Sustainable Finance Disclosure Regulation remains uncertain, with the European Commission currently consulting on whether the Article 6, Article 8 and Article 9 designations for sustainable funds should be scrapped.
Speaking at the Morningstar Sustainable Investing Summit, Elise Attal, head of EU policy at the UN Principles for Responsible Investment, said SFDR has caused “a lot of confusion in the market”.
However, she said it had been a “mini-revolution” that has helped cut greenwashing and improve transparency.
“We need to look at these regulations and the way we can streamline and improve it, because I don’t think anyone wants to go back to square one,” Attal said.
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Since launching in March 2021, Europe’s disclosure regime for green funds has been a headache for the investment industry.
Fund groups including Amundi and BlackRock shifted billions of client assets toward the end of last year from the ‘dark green’ Article 9 category — which must meet strict criteria under the EU’s ESG rules — to the ‘light green’ Article 8 bucket, which only ‘promotes’ environmental or social characteristics.
Asset managers had expected the European Commission to adopt a higher hurdle for funds wanting to market themselves as Article 9, but it ended up adopting a less stringent definition.
It is now mulling ditching its disclosure-based regime in favour of sustainable fund labels. The Financial Conduct Authority has proposed a labelling regime for its incoming Sustainability Disclosure Requirements.
Morningstar ran a poll days after the Commission’s consultation was announced. Half of respondents were in favour of the executive body starting from scratch.
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Attal said the comparability between products under SFDR is “problematic”, particularly Article 8 which is a “mixed bag”.
“It can mean a lot of different things and that needs to be clarified,” she told the conference.
SFDR hasn’t achieved its main objective to redirect investment flows to green strategies, she added.
“We’re not living up to the initial promise of the regulation, which was to mobilise retail money and redirect it toward sustainable funds,” Attal said. “When it comes to the provisions of MiFID II and the Insurance Distribution Directive there hasn’t been a massive uptake of ESG funds, and that’s what we want to achieve.”
In order to do this, SFDR should be flexible enough to enable product innovation and broad enough to cover all funds, Attal said, noting there is currently no transition category for investors helping to push fossil fuel firms toward net zero.
The FCA has proposed adding a label, called ‘sustainable improvers’, to cover these types of funds, which experts predict are going to explode in popularity.
Attal said the PRI — an initiative backed by more than 5,000 signatories including major asset owners and investment managers — is “broadly happy” with the watchdog’s SDR but said there are multiple blind spots.
There is no enforcement plan for firms that fail to comply, for example.
“The FCA has committed to publishing the details of the regime in this quarter so we’re just waiting to see more precisely what’s in there,” she said.
To contact the author of this story with feedback or news, email Kristen McGachey
