Will we reach a turning point in ESG investments, when, within 24 days, on March, the 10th, most of the Sustainable Finance Disclosure Regulation (SFDR) obligations will become applicable?
The current situation has indeed become quite paradoxical in the biggest market, Europe, representing 70% of the worldwide sustainable AuM : never before had ESG funds attracted so many investments, now worth $1.7tn, worldwide.
From ESG rebranding…
Why paradoxical ? Due to two phenomena. First, the growth of ESG funds has been accompanied by an increasing “repurposing” of non-ESG funds into ESG ones, in Europe, and sometimes thanks to simple rebranding lacking true responsible investment strategy. For instance, a recent article from the Financial Times exposes that, among others signs of greenwashing, some of the largest ESG funds, hold stocks of the largest carbon emitters companies…
…to ESG debranding
Second, due to the incoming sustainable finance regulations, and especially the SFDR disclosures, we now see previously ESG-branded fund being, timely, debranded… probably in order to avoid the more restrictive sustainable impact reporting obligations linked to ESG, green, or sustainable investment funds.
But ESG debranding will not clear the AM from all sustainable SFDR disclosures: the article 6 still applies— it will only clear them from the more restrictive sustainable disclosures imposed by the SFDR, e.g. in the articles 8 and 9.
ESG DEBRANDING WILL NOT CLEAR THE ASSET MANAGERS FROM ALL SUSTAINABLE SFDR DISCLOSURES—ONLY FROM THE MORE RESTRICTIVE.
It is worth noticing that the SFDR is indeed not limited to sustainable investments: all investors will need to explain how they manage the sustainable risks in their investment process, and also to explain why it is not relevant, if it is the case. Financial products with sustainable investment as objective have even more reporting obligations within the SFDR framework.
After a record year of collection for ESG funds during 2020, will we then see in 2021 a massive ESG debranding of… the same ESG funds ? Predictions are hard, especially about the future. But an option exists, and it is for Asset Managers to transform the regulatory obligation into an opportunity, by providing the end-investors with the clear and relevant ESG impact metrics they expect, in order to understand their own investor impact—and not being misled by “vanity” ESG metrics.
- A. Mooney and P. Mathurin, ESG funds defy havoc to ratchet huge inflows, The Financial Times, 6 February 2021.
- The 2° Investing Initiative, “Swipe Left:” Warum es bei nachhaltigen Finanzprodukten keine Matches gibt.
- D. Webb, DekaBank sued over ‘misleading’ fund impact calculator, 12 February 2021,