A survey on the next phase of the EU’s sustainable finance agenda has revealed strong support for the ongoing development of a ‘green’ label for investment funds, with new draft criteria launched.
According to the European Commission, 52% of those surveyed agreed that the EU should continue to develop an ‘Ecolabel’ for retail-based financial products, while 56% were in favour of widening it to cover funds aimed at professional investors.
The plans, which were first floated in 2018, fit under the existing Ecolabel initiative – an EU-operated certification awarded to European consumer products that abide by high environmental standards. This is the first time the Ecolabel will be applied to financial products.
The new criteria sets an overall ‘green’ threshold of 50% for mixed and bond funds, 40% for equity funds and 70% for alternative investment funds. It also introduces new requirements for fund managers to take long positions on shareholding and to report on their engagement impact
However, members of the working group developing the new label have struggled to establish eligibility criteria that strike the balance between aligning with ambitious environmental standards and being loose enough to be suitable for broader market adoption. Under the Ecolabel programme’s own rules, certified products are expected to have at least 10-20% of the available market share.
Elsewhere, green fund labels have so far reported low subscription rates. France’s leading SRI and Greenfin labels, for example, control 6% and 1% of the domestic market share, respectively.
The latest proposals from the working group – which mark the third revision of the criteria since the project was kicked off in 2019 – establishes two types of company that can be considered ‘green’: those “investing in green growth” and those “investing in transition”. Companies in the former category must generate more than half their revenue from green activities and have no exposure to a predefined list environmentally damaging activities; while those in the latter camp must have between 5% and 50% of green revenue, and commit to reducing their exposure to excluded activities.
The 'greenness' of equity investments will be now be assessed bon the basis of forecasted capital expenditure, the share of green revenue and green revenuegrowth. It is unclear how forward-looking information will be audited for transparency.
Corporate and sovereign green bonds will be assessed on their use of proceeds, while general purpose corporate bonds will be measured based on the proportion of the issuer’s revenue that comes from green activities.
The new criteria sets an overall ‘green’ threshold of 50% for mixed and bond funds, 40% for equity funds and 70% for alternative investment funds. It also introduces new requirements for fund managers to take long positions on shareholding and to report on their engagement impact.
The latest proposals are an attempt to incorporate feedback to the criteria’s previous two iterations, which were criticised by various stakeholders for either being too strict or not strict enough, and for providing insufficient incentives for companies to transition towards greener business models.
The proposals are now being circulated among European Commission departments for feedback ahead of the publication of a Final Technical Report in the coming weeks. The Ecolabel Board, which comprises representatives from EU member states, will vote on whether to adopt or reject the draft criteria in March.