EU faces “ambition dilemma” as it asks German experts to test new green fund label

Deliberations over draft criteria reveal split between Commission, working group members and wider market

The EU has mandated two German organisations to test its latest proposals for a green investment label, as documents reveal an “ambition-level dilemma” in drawing up the plans. 

The European Commission last year tasked a group of market participants and sustainable finance experts to advise it on what an Ecolabel for retail investment funds should look like. The Ecolabel already exists for consumer products, but this is the first time the brand will be applied to financial instruments. 

Earlier this year, the group, which includes BlackRock, Mirova, Amundi and BNP Paribas, recommended a controversial “three pocket” approach to assessing whether a fund's investments were green enough. The approach would theoretically allow Ecolabel-badged equity funds to have up to 80% of assets invested in ‘non-green’ stocks: at least 20% of assets would have to be in companies defined as in the “green pocket” – generating at least 50% green revenues – but the other 80% could be made up of ‘transition’ companies (deriving 20-49% of revenue from green activities) and ‘diversification’ companies (those that don’t meet any green criteria) or cash.

But in the latest proposals, put forward last month, the working group suggests that capital expenditure should also be considered, meaning that companies would have to demonstrate that their low-carbon transition plans were backed by their long-term corporate spending.

The changes reflect what is referred to in meeting notes seen by RI as an “ambition-level dilemma” for the EU. 

Insiders told RI that there is pressure from some asset managers to water down the Ecolabel rules if the Commission wants them to be adopted at scale, and in the first public consultation on the Ecolabel – conducted mid-2019 – 63% of respondents favoured a green revenue threshold below 50% for green equities, while others emphasised the need for non-green assets to be included for the sake of risk diversification.

An as-yet-unpublished investigation on lobbying on the Ecolabel, conducted by transparency watchdog InfluenceMap, reveals that BlackRock – recently mandated by the Commission to support ESG integration into EU banking rules – had proposed a minimum threshold of just 25% green assets for a fund to qualify for the label, and had come out against sectoral exclusions as they could “stifle legitimate ways for end investors to express their sustainability preferences”.

The European Fund Asset Management Association (EFAMA), the European Banking Federation (EBF) and the European Association of Cooperative Banks (EACB) were also found to have pushed back against either sectoral exclusions or the imposition of mandatory criteria, according to research from InfluenceMap.

However, if the criteria for inclusion is too loose, the new Ecolabel will lack credibility and could pose major reputational risks for the EU and any funds that used it. 

Sources say the Commission is keen to keep up with, or exceed, existing green investment standards, defined in labels such as LuxFLAG (Luxembourg), Greenfin (France) and Nordic Swan. 

According to the latest proposals, the working group is also considering amending the Ecolabel criteria to suit impact and active investment styles. For impact-focused funds, criteria would include social criteria and exclusions; while active funds would have engagement and exclusion criteria. These would apply in addition to the three-pocket green threshold requirements.

To date, the draft criteria has only been tested against six funds (and the thresholds were deemed to be “suitable”); but now the Commission has awarded a mandate to two German bodies with strong climate expertise – Ingmar Jürgens & David Rusnok GbR Advisors (known as Climate & Company) and the Frankfurt School of Finance & Management – to assess the Ecolabel draft criteria against 100 “real life” green UCITS funds to evaluate its feasibility. Results are due in June 2020.

Climate & Company was founded by Ingmar Jürgens, a former climate specialist at the European Commission, and David Rusnok, who left German development bank KfW last month. 

The Frankfurt School of Finance & Management is represented on both the European Commission’s Technical Expert Group on Sustainable Finance and the German Sustainable Finance Committee, by Karsten Loffler.