A $6 Trillion ESG Headache Is Bleeding Into Fund Flows
- Media Manager
- Oct 24, 2023
- 1 min read
Microsoft Start - Bloomberg
Written By: Frances Schwartzkopff
Published: October 25th, 2023
The world’s biggest ESG fund category is also by far its most opaque, and that’s starting to bug investors.
Asset managers are sitting on roughly $6 trillion of funds registered as Article 8, which is a European Union classification requiring that environmental, social and good governance goals be “promoted.” But according to fresh data from Morningstar Inc., roughly a third of such funds “target no sustainable investments.”
Article 8 has become the main destination for fund managers keen to market their products as ESG, without the hassle of having to live up to strict requirements. Last quarter alone, managers upgraded about $64 billion worth of funds to Article 8, according to Bloomberg Intelligence.
Tracking SFDR Upgrades and Downgrades
“More than 90% of the most recent moves were upgrades, mostly to Article 8, despite increased regulatory scrutiny,” BI analysts led by Adeline Diab said in a report on Wednesday.
Investors are increasingly skeptical. More than $20 billion was pulled from Article 8 funds last quarter, bringing six-month withdrawals to over $40 billion, according to Morningstar. Its analysis also found that portfolios suffering the biggest outflows were those with the weakest sustainability credentials.
The development has left the world’s largest ESG fund market in an awkward place, as a vision built on years of ambitious rule-making starts to unravel. The Sustainable Finance Disclosure Regulation, which is global in scope, is now the subject of a major review that the EU’s commissioner for financial markets and services, Mairead McGuinness, has said will seek to establish whether it’s in fact “fit for purpose.”
