24% of all Article 8 funds could have a greenwashing risk – MainStreet Partners ESG Barometer report reveals

by | Feb 26, 2024

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Impact investing

MainStreet Partners, the renowned London-based ESG and impact data provider, part of Allfunds Group, has launched its 2024 ESG Barometer report. This comprehensive annual report gauges key ESG-related trends in the European and UK funds market and attributes fund sustainability performance based on MainStreet’s proprietary holistic three Pillar methodology.

Analysis is conducted by MainStreet Partners’ Fund Research team, drawing on its proprietary ESG database of more than 7,700 funds/ETFs and over 83,000 individual ISINs, covering more than 350 Asset Managers with AUM totalling more than €10 trillion.

Neill Blanks, Managing Director at MainStreet Partners, said: “2023 was a challenging year for asset managers on many fronts, including responding to regulatory changes in Sustainable Investing, such as the FCA’s recently released Sustainable Disclosure Requirements (SDR). We introduced an SDR synopsis in this year’s ESG Barometer, covering the key implications for asset managers, such as marketing, use of data, type of fund, being compliant in time to gain the desired fund label. In helping asset managers to anticipate the needs of investors, we urge them to look beyond company operational sustainability to understand how companies play into global ecosystems. This can provide clarity on supply chain resilience or exposure to ESG-related issues, as well as identifycompanies with business models that challenge the status quo. It is through actions like this that asset managers can meet their regulatory obligations, and – importantly – identify and avoid allegations of Greenwashing.”

 
 

The report reveals a 20% year-on-year increase in the number of Article 8 funds, compared to a 24% Y-O-Y decrease in the number of Article 6 funds.

However, despite the growth in the number of Article 8 funds, MainStreet Partners has found that a quarter (24%) of all Article 8 funds could be accused of greenwashing based on their sustainability framework and practices. This is a 4 percentage-point increase of Article 8 funds that could be classified as ‘Greenwashing risk’ under MainStreet Partners’ criteria compared to the end of 2022.

According to MainStreet Partners’ 2024 ESG Barometer, strategies with the terms “Sustainable” (684) and “ESG” (631) were the most common used by asset managers. The “Sustainable” term was more likely to be found in active funds, whereas “ESG” was more commonly used in passive funds and ETFs.

 
 

Other Findings:

EET Analysis:

Scope 3 adoption within investment processes remains limited with only two areas explicitly considering the supply chains of companies, namely Article 8 European Bonds and Small and Mid-Cap European Equities.

 
 

While Scope 3 disclosure is prevalent across the market, a significant gap exists between data availability and integrating it into the investment decision making process.

Article 8 sectors look cleaner when adjusted for revenue, while Article 9 sectors are cleaner in absolute emissions than revenue adjusted. Therefore, different sustainability factors help identify appropriate funds for multiple client outcomes and data disclosure is vital when providing suitable solutions to different investor profiles.

Regulation:

• The introduction of new mandatory Principle Adverse Impact (PAI) indicators (tobacco production, employee wages and taxation) and the updated Pre-Contractual SFDR Disclosure and Periodic Disclosure Templates including a new dashboard page and emission reduction targets.

The release of SDR means funds with “Sustainable” in the name must meet the 70% threshold of assets aligned to the fund’s sustainability objective.

• Moreover, investment products built with funds must undertake an independent assessment of the products sustainability objective, how the objective is met and that assets do not conflict with the products objective. This being a service that MainStreet Partners provides to several financial institutions.

Private Assets:

• As of Q1 2023, the secondary private market accounted for more than $550 billion in AUM. MainStreet Partners expects this swell of assets to lead to increased demand for ESG assessment, as LPs bring their private investments in line with their other asset allocation.

• Engagement and Stewardship is often the main detractor for private asset funds due to lower accountability.

• ESG integration is particularly important for high-carbon-emitting sectors such as infrastructure and real estate.

• There is no ‘one-size-fits-all’ when assessing private assets due to the differences across private asset sectors

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