ESG funds swell in numbers despite disclosure failures

MainStreet Partner’s annual ESG Barometer reported just 997 Article 8 funds in 2021, which skyrocketed to 2,248 in 2022, with 758 new funds and 555 upgrades from Article 6.

While the number of Article 9 funds has remained steady since last year, there has been a rapid uptick in funds converting from Article 6 to Article 8, with the proportion of Article 6 funds dropping from 75% in 2021 to 50% in 2022.

However, serious questions remain around the disclosure of Article 8 and 9 funds.

Article 9 funds saw particularly poor reporting, with over 90% of funds failing to disclose environmental targets, according to the report, which covers over 5,700 funds from more than 300 asset managers with assets under management of £3.8trn.

Furthermore, about a third of Article 9 funds stated a minimum sustainable investment of 30% of less.

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When examining the size of asset managers, the report found that medium and larger asset managers still performed slightly better on ESG ratings than smaller or boutique asset managers, although the gap is narrowing.

Emerging markets also saw a lower result versus their developed market peers, scoring about 10% lower on ESG ratings in Article 8 and 9 funds.

However, the report was keen to note the lack of data and disclosure from emerging market regions makes ESG analysis “generally more difficult”.

There were also stark differences by asset class, as alternative funds made up a majority of poor ESG-rated funds (57.7%), while only 13 funds (or 0.6%) were viewed as good and strong ESG-rated.

Amundi maintained a strong lead over other asset managers by number of Article 8 and 9 funds, managing over 200 sustainable funds, compared to BNP Paribas in second with about 130.

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Simone Gallo, managing director at MainStreet Partners, said: “There is also significant confusion in the market about what constitutes a sustainable fund as well as how to avoid the risk of ‘greenwashing’ across a huge offering of new products marketed as ESG, Impact or Sustainable.

“For these reasons, we continue to see an increasing number of investors across Europe and Asia that either require, or desire, easy-to-understand and consistent ESG ratings that go beyond the simple bottom-up aggregation of ESG ratings of holdings to provide an independent holistic ESG due diligence.”