Consumer groups call for higher bar for ESG funds

March 11, 2022

A group of non-governmental organisations (NGOs) have called for higher standards for sustainable investment funds under the EU's Sustainable Finance Disclosure Regulation (SFDR).

In a paper published in late February, the six organisations recommended minimum standards for funds classified as Article 8 or 9 products, as well as broadening the scope of the relevant sections of the SFDR to "include all financial products".

The paper was jointly published by European consumer body BEUC, think tank E3G, campaign group ShareAction, the World Wildlife Fund, and NGOs Transport & Environment and Finance Watch.

It set out six core recommendations, including the development and adoption of "minimum criteria" for both Article 8 and 9 funds "to match the ambition of EU sustainability-related goals and ensure a well-calibrated regulatory framework". These criteria should apply to "all financial instruments", the paper said.

Such criteria, the organisations said, should include minimum sustainability performance, engagement and stewardship requirements, exclusions, information about the types of security, and "their capacity to effectively allocate capital to the real economy".

As well as the minimum requirements, the paper called for "appropriate disclosures" to allow investors to verify each product's credentials, and for the rules to be aligned with other EU finance legislation such as MiFID II and the Insurance Distribution Directive.

Finally, the paper called for the roles of the EU and national regulators to be strengthened, to help them identify, tackle and reduce greenwashing.

Under the SFDR, funds classified as Article 8 - also dubbed 'light green' funds - are those that promote environmental or social characteristics "provided that the companies in which the investments are made follow good governance practices". The regulation includes sustainability risk indicators that are expected to be integrated into a fund's strategy in order to obtain Article 8 status.

Meanwhile, Article 9 funds are defined as those that have specific sustainable investment or carbon emission reductions as part of their core objective.

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