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Europe’s fight against greenwashing

By 14 mars 2023février 23rd, 2024No Comments

Europe’s fight against greenwashing

Following COP21 in Paris in 2015, the European Union established an elaborate framework that constitutes its “Green Deal” and Sustainable Finance Plan for Europe. We would like to underline herein for the purpose of this article, two European Regulations that have been elaborated:
  • Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 concerning the disclosure of information on sustainable development in the financial services sector (known as the SFDR Regulation).
  • Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2002 establishing a framework to facilitate sustainable investment and amending Regulation (EU) 2019/2088 (known as the Taxonomy Regulation).
In this article, we will only focus on SFDR and Europe’s fight against greenwashing, and try to assess the situation as of date from a point of view of regulators and asset managers.
First, we chose to share this interesting timeline about the implementation of what is now known as Sustainable Finance as illustrated below :

In fact, the European Union has introduced new rules to prevent misleading claims about environmentally-friendly investments, known as “greenwashing”.

Now according to experts in the industry, there are still inconsistencies in asset managers’ application of sustainable investing standards. This fact makes it difficult for investors to identify genuine eco-friendly funds.

Moreover, this has led to confusion among investors and created vulnerabilities in paying higher fees for funds that may not deliver on their advertised green status or reflect underlying sustainability risks.

SFDR aims to outlaw misleading claims, but experts say the lack of clarity over what constitutes a sustainable investment still remains.

As demand for green investments increases, investment managers are rushing to label their products as sustainable, even when portfolios still contain carbon-intensive businesses.

Interestingly, based on SFDR data collected from prospectuses, SFDR fund type breakdown by assets shows :

  • 3.3% of Article 9 funds
  • 52.2% of Article 8 funds
  • 44.5% of Article 6 funds

The inconsistencies in the portfolios claiming green credentials have not been resolved by the new regime. Morningstar data shows that as of mid-January, more than 100 out of 891 Article 9 funds in Europe were invested in some aspect of thermal coal, a big climate change contributor.

Also, MSCI, the finance industry data provider, has developed a way of checking on investment funds’ green credentials with its ESG Implied Temperature Rise tool. This is used by the funds industry, while some fund managers also have their own versions to keep track at the portfolio level.

However, when analysed using MSCI’s tool, 16 of the 20 biggest Article 9 funds, as ranked by Morningstar, are not currently aligned with a goal agreed by governments in 2015 to limit global warming to 1.5 degrees Celsius.

Reuters reported that financial regulators in Ireland and Luxembourg are reviewing disclosures made by local funds. The spokesperson for the Irish regulator stated this to Reuters, as did the spokesperson for the Luxembourg regulator, the CSSF.

The CSSF spokesperson also mentioned that there has been an increase in demand for sustainability-focused financial products due to regulatory developments, but there is currently no universally accepted definition of greenwashing under the EU regime.

Does the concept of what constitutes a sustainable investment under the SFDR require further clarifications at the European level?

Sources : ESMA Europa, Reuters, Société Générale.

DISCLAIMER: This article is informative and should not be considered as a legal, tax or any other advice or opinion. We strongly advise you to contact our experts at Monaco Private Advisory Multi-Family Office (MPA MFO) for an accurate assessment of your situation.