Stockholm (NordSIP) – European-domiciled funds with ‘ESG’ in their name hold more shares in fossil fuel companies than they hold in green investments. This is one of many discrepancies found in new research published today, 12 December 2024 by non-profit think-tank InfluenceMap in anticipation of forthcoming European Securities and Markets Authority (ESMA) fund naming guidelines.
InfluenceMap’s research examined 17,529 equity and fixed income funds domiciled in the EU, roughly half of which used ESG or climate-related denominations or have opted to disclose under Sustainable Finance Disclosure Regulation (SFDR) Article 8 or 9. The analysis reveals that 60% of funds with climate-related terms in their title do not disclose under Article 9, despite this category being aimed at investment products with sustainability as a primary objective. This is even more evident for funds described as ‘sustainable,’ with 71% of these opting out of Article 9.
The researchers also analysed the climate performance of Article 8 and 9 funds, as well as those described as ‘ESG’ or climate focused. This included metrics related to fossil fuel exposure, ‘green’ company exposure, and alignment with the International Energy Agency’s (IEA) net-zero 2050 scenario. The cumulative €500m overweight to the fossil fuel sector versus green industries displayed by so-called ESG funds demonstrates that the fund naming guidelines proposed by the ESMA in May 2024 are not yet being followed. Under the latter, funds described as ‘Sustainability’, ‘Environment’, ‘Impact’, and ‘Transition’ must adhere to strict criteria including minimum proportion of demonstrably sustainable investments and the exclusion of the most climate-damaging fossil fuel companies. It is nevertheless worth noting that existing funds are still within a 6-month grace period applied to the ESMA guidelines that went live only last month.
Article 8 fossil fuel overweight
While Article 9 funds were found to be investing 20 times more in green industries than fossil fuels, the same cannot be said for Article 8 funds. These cumulatively display a €4.4 billion overweight to the fossil fuel sector. Unfortunately, despite the Article 9 funds’ green investments InfluenceMap found that 77% of them are not aligned with IEA net-zero pathways, mainly due to underlying holdings in misaligned energy companies.
Tom Alcoran, Senior Analyst at InfluenceMap believes the European fund industry is failing to keep up with current and incoming stricter sustainability-related fund naming regulations: “Thousands of funds are representing themselves as climate positive, either by using climate related names or by disclosing under Article 8 or Article 9 – despite their underlying investments painting a very different picture. This shows that the lack of consistency and transparency which has been a feature of the EU’s sustainable fund market over the past years continues to persist. Without funds changing their portfolio allocation or rebranding to meet EMSA’s fund naming criteria, many funds risk non-compliance.”
Once the grace period is over in May 2025, fund providers run the risk of non-compliance with ESMA guidelines of they have not either renamed their products of adapted their underlying asset mix. InfluenceMap highlights the fact that aside from ‘Impact’ funds, on average the remaining sustainability-related products are misaligned with net-zero pathways. The report concludes that current EU regulatory mechanisms are failing to prevent the fund industry from displaying a significant lack of consistency and transparency for investors hoping to invest in suitable climate-related vehicles.
