The European Securities and Markets Authority (ESMA) is proposing softening the requirements for its Ecolabel for green financial products after just 0.5% of funds marketed as sustainable met eligibility criteria.
Analysis by the regulator found just 26 of 3,000 environment, social and governance (ESG)-focused UCITS funds have a portfolio greenness ratio above 50% while only 27% of Sustainable Disclosure Requirements (SFDR) Article 8 and 9 funds have no exposure to fossil fuels.
It also said relaxing the 50% requirement would boost numbers significantly. According to the survey, 69 funds would meet a 40% threshold and 136 funds would meet a 30% threshold.
“The EU Ecolabel for retail financial products could bring benefits to investors by introducing minimum sustainability criteria based on standardised definitions and increasing transparency”, ESMA said.
“However, its success would depend on its perceived credibility and the level of take-up by product managers.”
The Ecolabel is an EU-wide label awarded to green products and services. A version of the label for retail financial products is being considered in a bid to help retail investors make decisions on the sustainability of financial products.
However, disagreements remain over how stringent the requirements should be with the regulator treading a fine line between boosting the number of funds using the label and damaging its credibility.
In the wake of the analysis, the regulator now faces the challenge of loosening some of its Ecolabel thresholds to cover more funds while at the same time not damaging the credibility of the scheme by being too permissive.
The report comes as ESMA tackles the issue of defining sustainability as part of level 2 of SFDR being implemented from this month as well as subsequent ESG fund naming rules.
Level 1 of SFDR, which came into force on 30 June 2021, required firms to publish and keep a statement on their website relating to their principal adverse impact (PAI) and due diligence policies.
Level 2 takes in further with a mandatory reporting template, It outlines a set of indicators for the PAI statement, focusing on climate- and environment-related adverse impacts as well as social impacts such as human rights and anti-corruption.
These are divided into a set of 14 core indicators and 31 additional indicators and groups need to report on all 14 core indicators plus 2 additional (at least one climate-related and one social-related) indicators.
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