Some 44% of funds using environmental and impact terms may need to change their name or divest assets due to being invested in assets that breach the Paris-aligned benchmark (PaB) exclusion criteria, according to an analysis from Clarity AI.
The research found nearly half (49%) of Article 8 funds with environmental or impact-related terms contain investments in companies with breaches, while around a third of Article 6 (36%) and Article 9 (29%) funds were similarly exposed.
PaB exclusionary criteria relate to exposure to certain sectors or revenue streams, such as fossil fuels, tobacco and companies whose revenue comes from intense energy generation.
Tom Willman, regulatory lead at Clarity AI, noted, while much of the commentary has focused on meeting the 80% threshold of assets to achieve sustainability characteristics or a sustainable investment objective, applying the exclusions from the Paris-aligned benchmark regulation may be a tough task for much of the industry.
“Funds will need to collect data in order to ensure they are not exposed to any assets involved in tobacco, controversial weapons or breaches of global norms, and fossil fuel related activities are limited and below a certain threshold,” Willman explained.
“The vast majority of the funds using related terms that are breaching the exclusion criteria are Article 8 funds. The limits imposed on fossil fuel-related activities are a key driver of these breaches. However, breaches occur across the board, including exposure to tobacco production and controversial weapons. These breaches are not isolated, as many funds were individually invested in multiple companies that violated the exclusion criteria.”
ESMA rule
Earlier this month, the European Securities and Markets Authority (ESMA) published guidelines for sustainability-related fund labels, giving funds up to nine months to make the necessary adjustments to comply.
The ESMA rule applies to any EU fund using an ESG or sustainability-related term in its name. The rules vary depending on the term used, but broadly stipulate that any asset manager using a generic sustainability, environmental or impact term must ensure that a minimum of 80% of assets are used to meet the environmental and/or social characteristics or sustainable investment objectives of the fund, and that there is no exposure to assets that breach the PaB exclusions.
In its final guidance, ESMA noted Article 8 funds would likely be the most impacted by the rules. They also mentioned Article 6 funds impacted by the guidelines may have to re-classify to Article 8 to ensure they can hit the 80% threshold for promoting environmental or sustainable characteristics or achieving sustainable investment objectives.
