Delays to corporate sustainability reporting legislation makes investor assessments more challenging, says Clarity AI.
Equity funds labelled as Article 8 under the EU’s Sustainable Finance Disclosure Regulation (SFDR) are no more aligned with the environmental taxonomy than non-ESG funds, according to Clarity AI.
The sustainability technology provider assessed 2,000 regulated SFDR-labelled equity funds on the percentage of underlying revenue actively contributing to the taxonomy’s climate mitigation and adaptation objectives. This was part of its wider analysis of the green revenues of 31,000 equity funds globally.
The whitepaper first identified the percentage of fund revenues eligible for further taxonomy-alignment analysis, and then calculated the percentage actually aligned once the taxonomy’s technical screening criteria, do no significant harm and social safeguards were applied.
It found that on average 3.9% of an Article 8 fund’s underlying revenue is taxonomy-aligned, compared to a 3.1% average for Article 6 funds. Article 9 funds averaged 15% green revenues. Twenty eight percent and 5% of the SFDR-labelled funds analysed were labelled as Article 8 and 9 respectively.
SFDR Level 1, which went live in March 2021, asks asset managers to sort their EU-domiciled funds into progressively greener categories: Article 6, 8 or 9. Level 2, which has been delayed, will introduce regulatory technical standards (RTSs) for asset managers to justify their fund categorisations through a series of both environmental and social principal adverse impact (PAI) disclosures.
“Investors should not be misled by Article 8 labelling of funds, which will likely not mean a higher share of green revenues than non-sustainable funds,” the report said.
This follows previous criticism about the lack of minimum sustainable investment thresholds for prospective Article 8 funds, with the European Commission’s attempt to clarify requirements for Article 8 funds argued to be “lowering the bar”.
Research by investment research provider Morningstar also noted a wide spectrum of strategies employed by Article 8 funds, ranging from minimal ESG-based exclusions to more sophisticated funds that could qualify as Article 9.
As part of its 2022 sustainable finance roadmap, the European Securities and Markets Authority plans to support the Commission’s development of minimum sustainability criteria for SFDR Article 8 products.
Delays and more delays
Measuring the alignment of SFDR-labelled funds with the taxonomy is proving challenging for investors due to regulatory delays on the introduction of more granular corporate sustainability reporting, Clarity AI noted.
From January 2022, under the taxonomy’s Article 8 Delegated Act (DA), financial and non-financial entities have been required to identify and disclose the eligibility of their activities in line with the taxonomy on a rolling basis.
As more DAs are finalised over the course of the year, investors will need to assess and disclose the eligibility of their funds across a wider range of environmental factors, meaning they need access to more data from investee companies.
This will be provided by companies reporting in line with the Corporate Sustainability Reporting Directive (CSRD). However, this week, the European Parliament has recommended that the CSRD should be delayed by a year, with disclosures expected from 2025.
NGOs from the Alliance for Corporate Transparency also expressed concern that small- and medium-sized enterprises (SMEs) have been taken out of the scope of mandatory reporting, further limiting the data pool investors need.
“The EU recognises that a key requirement to further the development of the sustainable investment market is access to high-quality sustainability-related data,” said Patricia Pina, Head of Product Research and Innovation at Clarity AI.
“This high-quality data also means moving away from subjectivity and using an objective and fact-based definition of what should be considered green, social, environmental, and so on,” she said.