Maturing ESG Funds Market Prompts Eurosif Recalibration

With regulation increasingly promoting transparency and ambition across sustainable investment strategies, Chair outlines plans to update how it measures the market. 

The rapid evolution of the sustainable investment market in Europe is forcing changes to the methods used to capture its size and growth. In the wake of recent tweaks to US practices, a shift is under way in how Europe counts its sustainable funds, partly driven by regulation.  

“The European [sustainable finance] marketplace is one of the most dynamic globally and has developed one of the most advanced regulatory disclosure frameworks,” Will Oulton, Chairman of the European Sustainable Investment Forum (Eurosif), told ESG Investor. 

Eurosif and other regional sustainable investment forums (SIFs) assess and capture trends across markets and the different investment approaches being used, including sustainable and responsible investment strategies, on a biannual basis. “To do this effectively, it’s very important that we implement as accurate a methodology as possible,” said Oulton.  

Given the rate of change seen in Europe over the past few years, from the launch of the environmental taxonomy to the ongoing refinement of the Sustainable Finance Disclosure Regulation (SFDR), Eurosif’s existing methodology, which is over ten years old, is no longer “fit for purpose”, he said.   

Oulton, also Responsible Investment Advisor at First Sentier Investors, noted that the current methodology doesn’t have a specific category to effectively capture SFDR’s Article 9 funds, which promote environmental and/or social objectives. Existing categories include socially responsible investments, best-in-class and impact investment vehicles. “There also isn’t a category around transition,” he added.  

Further, there is “reduced interest” in strategies with a minimum level of non-binding ESG integration or basic exclusions, Oulton said. Recent media reports that Eurosif’s review will half the size of Europe’s sustainable investment market appear to be wide off the mark, but there will be a “recalibration” of what constitutes a sustainable investment within Eurosif’s revised methodology, which may subsequently reduce the size of the jurisdiction’s sustainable investment market.  

US SIF Foundation’s own methodology changes did, however, result in its 2022 market assessment halving the overall amount of US asset managed sustainably from US$17.1 trillion in 2020 to US$8.4 trillion. The SIF’s new methodology made a new distinction between firm- and fund-level sustainability claims and did not include the AuM of investors that stated they practice firm-wide ESG integration without outlining their specific ESG criteria used in decision-making and portfolio construction.  

“Our colleagues around the world recognise that markets are moving in the same direction, just at different paces,” said Oulton. “Other SIFs may continue to use the older way of capturing and measuring for now, but Eurosif needs to reflect the changes we’re seeing across the EU and the UK.” 

Evolving regulatory landscape 

Eurosif’s new methodology will be “sympathetic and not replicant” of the SFDR model, said Oulton. 

Questions remain over aspects of the regulation, including calls for clarity on what is meant by a ‘sustainable investment’. This week, the European Supervisory Authorities published a public consultation outlining their proposed amendments to SFDR’s principal adverse impacts (PAI) and regulatory technical standards (RTSs). 

When SFDR Level 2 went live in January, introducing these more granular disclosure requirements to justify funds’ Article 8 (environmental and/or social characteristic) or 9 categorisations, many Article 9 funds were downgraded for fear of being accused of greenwashing.   

Recent research published by think tank New Financial, in partnership with Luxembourg for Finance, noted a sharp decrease in the number of sustainable investment funds originally identified in 2020 when using revised data.  

In 2021, the datasets used by New Financial indicated that global sustainable investment fund value in 2020 was in excess of US$1.8 trillion, with US$1.5 trillion based in Europe. However, revised figures noted that the global value of sustainable investment funds in 2020 was US$1.3 trillion. Of the US$505 billion that “went missing”, 97% was allocated to European funds.  

Fund reclassifications under SFDR “could be one of the reasons for the drop in value”, the report said, adding that what was recorded as ‘sustainable’ in the 2020 dataset may not be considered ‘sustainable’ or ‘ESG’ today. 

“SFDR is going to continue to evolve, with the European Commission’s review expected later this year, and likely some more tweaks and changes will be made after that,” Oulton noted, adding that it is “an extensive piece of regulation that has been brought in at an astonishingly quick pace – it was never going to be perfect from launch”. 

Eurosif will also be considering the UK Financial Conduct Authority’s (FCA) Sustainability Disclosure Requirements (SDRs), which introduce three labels for sustainability-focused funds. The FCA recently announced it would be delaying the implementation of these new rules.  

“We [Eurosif] fully support the FCA’s efforts so far,” said Oulton. “They have been careful to watch the challenges SFDR has had and sought to avoid some of the weaker areas.” 

Building confidence  

Eurosif has asked Timo Busch, a Professor in the Department of Socioeconomics at the University of Hamburg’s School of Business, Economics and Social Science, to work with the foundation and its members to review its existing methodology. Busch teaches courses on corporate sustainability, business strategy and the environment, and sustainable finance. 

“It’s a work in progress,” said Oulton, noting that the target is for Busch to finish this work in consultation with Eurosif members by the end of this year.  

“By then, we should have a much more accurate picture of the different types of sustainable and responsible investment approaches and strategies that are being manufactured and promoted across Europe, and whether they are growing or other,” he said. 

“We want confidence in the sustainable investing market to continue to build so that we can achieve the goals we need to achieve.” 

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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