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Green
ESG
ASSET MANAGERS SEEN AXING ALMOST ALL SALES OF TOP ESG FUNDS
* Article 9 funds worth over $100 billion already downgraded
* Investors are starting to complain about the development
Photographer: Wolfgang von Brauchitsch
By
Frances Schwartzkopff
+Follow
December 5, 2022 at 12:31 PM GMTUpdated onDecember 5, 2022 at 2:34 PM GMT
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Open
Investors will struggle to find top-ranked ESG funds after Christmas, as asset
managers shy away from Europe’s strictest sustainability tag in response to
tougher regulations, according to an analysis by Jefferies International Ltd.
BlackRock Inc., Pacific Investment Management Co. and Amundi SA are among firms
that have already said they’re removing the EU’s highest environmental, social
and governance fund designation, known as Article 9, from large chunks of their
business. A Bloomberg tally indicates that funds worth at least $100 billion
have been downgraded, though the actual figure may be significantly higher.
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With the development set to continue, the number of new Article 9 funds being
issued “will be close to zero” in the new year, Luke Sussams, head of ESG and
sustainable finance for Europe at Jefferies, told Bloomberg Monday.
Article 9 downgrades now make up 87% of all product reclassifications in the EU
asset management industry, based on prospectus changes as of Nov. 22, according
to a Jefferies note to clients. Morningstar Inc. estimated in mid-September that
Article 9 funds accounted for roughly $470 billion of assets under management.
Read More...
* BNP, DWS Add to Wave of ESG Fund Downgrades as Clients Balk
* Asset Managers Have Downgraded Over $100 Billion in ESG Funds
* Man Group Unveils Top-Ranked ESG Fund Amid Downgrade Frenzy
* Amundi, Deutsche Bank’s DWS Downgrade ESG Funds in Big Reset
Fund managers have blamed regulatory guidance after the European Union clarified
existing rules to state that Article 9 funds must hold 100% sustainable
investments — except for hedging and liquidity requirements. But investors want
more answers. Better Finance, which represents roughly four million
financial-services users, has turned to the European Commission and the European
Securities and Markets Authority to seek assurances that client savings aren’t
being exposed to greenwashing.
For asset managers, Europe’s regulatory landscape is likely to get more
difficult to navigate next year. Beginning in January, the industry will have to
provide more information than previously required on ESG products offered,
including what proportion is in sustainable investments and what adverse impacts
these are likely to have.
Europe implemented its groundbreaking ESG rulebook — the Sustainable Finance
Disclosure Regulation — in March 2021. Intended as a global gold standard, SFDR
has transformed the asset management industry by setting the world’s most
ambitious green goals. But it’s also faced an increasing drumbeat of criticism
from investors and regulators alike for being fiendishly complex and not always
consistent.
The European Commission has said it’s aware of a number of the issues raised and
is looking into the matter.
Failure to correctly categorize a fund product can lead to regulatory action
against an asset manager. European authorities are already considering new
minimum requirements after concluding that investors may already be subject to
inflated ESG claims.
At the same time, the growing scarcity of Article 9 funds is going to make them
increasingly coveted products, according to Charles Boakye, an ESG analyst at
Jefferies. Flow data shows “the end asset owner would appear to have a higher
preference for Article 9,” he said. “Given the difficulty in bringing such
products to market,” it’s likely that investors are going to “keep demand for
Article 9 products high.”
In future, the designation will probably be limited to “thematic and
impact-oriented funds investing in companies that focus on sustainable products
and services,” which often tend to be small- or mid-caps, or to “bond funds
whose proceeds help finance green and social projects,” according to Hortense
Bioy, Morningstar’s global director of sustainability research.
Sussams said he doesn’t expect fund downgrades to undermine investor confidence,
given the newness and the scale of the regulatory challenge.
“This is the market figuring out new, highly disruptive, regulation,” he said.
(Adds detail in fourth paragraph regarding downgrades in the current quarter;
prediction around demand in fourth-to-last paragraph.)
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