Only 4% of “sustainable” investment funds would automatically comply with the labelling and naming rules for disclosures set by major regulatory regimes.
The regimes for sustainability disclosures and labels, particularly for environmental, social and governance (ESG) issues, differ significantly across the US, UK and EU as respective governments and regulators try to ensure that capital flows to sustainable companies and projects, warns technology platform Clarity AI.
Its analysis of more than 18,000 funds, Overcoming Regulatory Confusion: A Study of EU, UK and US Sustainable Investment Fund Frameworks, reveals that 96% would require renaming or restructuring in order to operate across the three markets. Some 85% of funds with “sustainability” in their name would not comply with at least one regulation across the three regimes.
Clarity AI pointed to the European Securities and Markets Authority’s (ESMA) November consultation paper, On Guidelines on funds’ names using ESG or sustainability-related terms. This suggests imposing minimum thresholds on Article 8 or “light green” funds that use ESG-related terms in their names and that should be aligned with the Paris Agreement. Clarity AI’s analysis reveals that just 20% of Article 8 funds using the term “sustainable” would meet one of the thresholds to comply with ESMA’s recommendations.
“Although each jurisdiction might have contextual differences worth taking into account, capital markets are global markets and we need stronger regulatory alignment across borders,” said Clarity AI head of product research and innovation Patricia Pina.
“Understanding and characterising ESG and sustainability differently will only contribute to increasing the existing confusion in the market and potentially result in ‘greenwashing’, which is exactly what these regulations aim to fight.”