Almost no sustainable-labelled funds align with UK, EU and US labelling rules

Very few funds with sustainability language in their names comply with proposed labelling rules put out by UK, EU and US regulators, while 85 percent fail to comply with any of the three regimes, according to research by Clarity AI.

The analysis looked at 1,514 funds from all three jurisdictions with sustainability-related terms in their names. It found that just 15 percent of these funds complied with at least one of the three proposed regulations, and that just 4 percent of this subset complied with all three.

Under ESMA’s labelling proposal, funds with sustainability-related terms must invest at least half their assets in sustainable investments, while under UK rules 70 percent of assets must be aligned with a credible standard of sustainability to qualify for the Sustainable Focus label. Proposals in the US say at least 80 percent of assets must be aligned with the strategy that the fund name suggests.

In order to be marketed across all three jurisdictions, more than 95 percent of these funds would require renaming or restructuring, the report’s authors said.

Looking specifically at Article 8 funds under the EU’s SFDR regime, Clarity AI found that only one in five with sustainability-related terms currently plan to make sustainable investments of over 50 percent, which would meet the ESMA proposals.

The picture is looking better for funds with ESG-related terms in their names.

Looking at a sample of 751 European funds with various ESG-related terms in their names, 59 percent comply with at least one regime, and 85 percent of that sample comply with all three, for an overall percentage of just over 50.

Under EU, UK and US proposed naming rules, these funds must have 80 percent, 70 percent and 80 percent of assets aligned with their suggested focus, respectively.

Patricia Pina, the firm’s head of product research and innovation, said that although there are contextual differences across jurisdictions, “capital markets are global markets and we need stronger regulatory alignment across borders”.

“Understanding and characterising ESG and sustainability differently will only contribute to increasing the existing confusion in the market,” she continued.

The research also looked at the proportion of each SFDR category with ESG or sustainability terms in their names. Clarity AI’s analysis found just under three quarters of Article 8 funds and 29 percent of Article 9 funds have no ESG terms in their names, a result which the firm said suggests that ESMA’s labelling proposals will have a relatively small impact on the market.

Also included was the prevalence of specific ESG-related terms in fund naming. Looking at funds with English language names only, just under 40 percent of labelled funds contained “ESG”, followed by “climate” at 9.3 percent. Funds with “transition” in their name were the eighth largest group, accounting for 2.8 percent of funds.