ESMA: Less than 1% of sustainable funds meet EU’s Ecolabel criteria

Analysis of more than 3,000 sustainability-orientated funds by EU financial watchdog reveals few Articles 8 and 9 vehicles would make the cut.

Less than one percent of sustainability-focused retail funds would meet the minimum requirements of the EU’s proposed Ecolabel, according to an analysis of 3,000 UCITS equity funds by the European Securities and Markets Authority (ESMA). 

The Ecolabel is an EU-wide designation awarded to green products and services. As part of the European Commission’s 2018 Action Plan on Sustainable Finance, it was to be expanded to cover green retail investment products for the first time.  

But the effort has been beset by disagreements around the level of ambition it should seek to set, and the work has been on hold since March 2022 following the European Commission’s decision to rebrand nuclear and gas energy as green under the bloc’s green taxonomy.

ESMA’s assessment, which was published at the end of 2022, tested thousands of funds representing more than €1 trillion in assets against three key criteria of the proposed Ecolabel, including the minimum portfolio greenness threshold of 50 percent alignment with the EU’s green taxonomy. 

financial services company Morningstar provided data on the funds, of which 429 were designated as Article 9 and 2,612 as Article 8. Under the EU’s anti-greenwashing Sustainable Finance Disclosure Regulation (SFDR), Article 8 funds promote ESG characteristics and Article 9 ones have sustainable goals as their objective.  

ESMA found that just 26 sustainability-orientated funds have a portfolio greenness ratio above the proposed Ecolabel threshold. 

That included 10 Article 8 products and 16 Article 9 products, corresponding respectively to 0.4 percent and 3.7 percent of the sample of Article 8 and Article 9 funds. 

ESMA found that relaxing the Ecolabel threshold requirement substantially increased eligibility, with 69 funds above the 40 percent threshold, and 136 funds above the 30 percent threshold. 

The regulator also looked at how the funds performed against the Ecolabel’s exclusionary criteria around fossil fuel limits, pesticides, tobacco and controversial weapons. Here the funds performed better, with 1,472 – 48 percent of the sample – passing all four exclusionary criteria. 

However, when combined with the proposed minimum portfolio greenness, just 0.5 percent of the sample funds would meet the Ecolabel requirements. 

ESMA said its analysis illustrated the challenge of balancing the “credibility of the label and feasibility of the requirements” when choosing criteria and thresholds.  

In March, Responsible Investor reported that insiders working on the label had pointed to pressure from asset manager representatives involved in the Ecolabel working group to loosen minimum green requirements and ease sectoral exclusions.  

ESMA referenced this in its study, stating that the technical proposals put out in 2021 by the European Commission’s Joint Research Centre provoked “industry concerns about the calibration of the thresholds, with some asset managers and trade associations warning over the consequences of adopting overly selective criteria”. 

The securities regulator also highlighted in its analysis that the “currently limited availability of taxonomy-related information” constitutes a “major challenge”. 

Until the EU’s corporate sustainability disclosure regime (CSRD) is up and running, ESMA said the implication is that product managers “will either need to estimate (and justify) the alignment of companies in their portfolio with the EU taxonomy or need to rely on proxy data produced by third-party providers”. 

European Commission staff appointed to oversee the Ecolabel’s development declined to comment on its status due to ongoing “assessments” when asked by RI last month.