The reign of ESG funds quantity, and the signs of the times

According to the Novethic indicator, published last week, the offer of sustainable funds is massively growing in France, combined with an always more demanding retail market. This situation is not unique in Europe: the same trends are reflected in the national markets of countries such as Italy, Spain, or the United Kingdom, etc. The trends and market data are furthermore indisputable: in 1 year, between Dec. 2018 and Dec. 2019, the number of sustainable funds has grown from 438 to 704, and AUM have almost doubled, from €149bn to €278bn.

There is indeed a very strong momentum for Sustainable Finance, and especially for Thematic Funds, representing a quarter of the offer, but with a greater collection ratio (45%) compared with non-thematic sustainable funds.

So far, so good, we might say, but, but, unfortunately, quantity is not a synonym for quality. Behind the scene, for most of all these “so-called” sustainable funds, the situation is far from brilliant, when the ESG criteria’s quality is investigated… with a transparency almost lacking.

The french “Label ISR” (SRI Label) as so far been granted to 263 funds, among other certified funds with a national label. This kind of label is supposed to be the first step on the way towards a greater transparency, but it is still, today, not sufficient to be fully trusted, and here is why: the Label ISR only ensures that a selection process exists, and that it integrates ESG criteria. The rest is left a the discretion of the fund manager: how the process is applied, what are the thresholds, etc. For instance, a Label ISR fund doesn’t need to be 100% ESG-compliant. No opinion is provided by the certification authority on the companies composing the funds, or the quality of the method used, the existence of positive or negative impact metrics or score… And regarding the non-labelized sustainable funds, the situation is even worst and more obscure… with sometimes only a slight “greening” for some new or existing funds…

These are some of the reasons why the EU Taxonomy, and the future EU Label, are more than welcome. Let’s hope they will both help to provide more transparency in sustainable finance, and foster a truly sustainable investment approach. The risk faced, once again, is the generalization of greenwashing to gain market shares, which will end in the disillusion of the retail investor and strip the sustainable finance market of its whole credibility…

Until then, quantity will continue to prevail over quality, as a sign of the times.

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