The European Commission (EC) is testing the applicability of draft criteria for the first EU-wide green investment fund label against “real life” green equity funds.
DG FISMA, the EC department responsible for banking and finance policy, has published a call for tender to compare the draft criteria for the EU Ecolabel for Financial Products against “a representative sample of green UCITS equity funds” and establish whether the selected funds meets the proposed criteria. UCITS, the pan-EU mutual funds, account for €8trn in assets all told.
"Strike the right balance between achieving environmental excellence and allowing the best existing financial services available on the market to be eligible for the EU Ecolabel”.
The objective of this exercise, according to the notice, “is to strike the right balance between achieving environmental excellence and allowing the best existing financial services available on the market to be eligible for the EU Ecolabel”.
The Ecolabel is an existing EU certification awarded to products and services which meet high environmental standards. The scheme currently covers a diverse range of product groups including food and consumer goods but this is the first time the label’s scope is being extended to include investment funds.
In line with the Ecolabel’s focus on the end consumer, the green fund label will be aimed at retail investors. UCITS funds provide a natural starting point as the most commonly invested fund type for non-professional investors.
However, while the Ecolabel scheme has been designed to support mass market adoption, there are concerns that the draft criteria for funds are significantly more stringent and will apply only to a small sliver of the market.
The divisions were laid bare in a June meeting of the working group appointed by the EC to advise on the certification’s criteria. According to meeting notes, the EC and a number of participants supported more stringent criteria than existing green fund labels to ensure the certification brought “added value”.
Customers were concerned, they said, that existing sustainable funds were not complying with high standards and were interested in understanding how a fund’s “greenness was calculated”.
But this approach, reasoned others, will result in only a small number of funds being awarded the certification and result in a negligible impact on the economy. According to participants, France’s domestic label for green funds, only applies to 0.01% of the French market, while Luxembourg’s LuxFlag Climate finance label was only held by four funds as of June (this has since dropped to three).
This suggests that stricter standards then existing green fund labels in France or the Grand Duchy will correspond with far less than the 10-20% of available financial products available on the market as recommended by the Ecolabel regulation.
Members of the working group, which include investment giants BlackRock and Amundi in addition to groups UKSIF and Better Finance, also argued that stringent criteria prevents diversification which could cause Ecolabel-badged funds to “underperform significantly in comparison to other funds”.
The Ecolabel draft criteria, published for consultation in March, proposes that eligible funds have 70% of overall assets invested in ‘green’ economic activities as defined by the green taxonomy under the EU Sustainable Action Plan. Within those limits, green investments are expected to account for 90% of a fund’s total equity holdings and 70% of all bonds.
The latest move in the development of the green taxonomy last week suggests that the two-year Ecolabel project is on track to meet its deadline of Nov 2020. There were previously concerns that negotiations over the taxonomy – a catalogue of green economic activities which underpins the EU’s sustainable finance push – could extend long into 2020.
The deadline for applications to the tender is later this week, on December 13.