Minimum standards needed for EU ESG funds, says French regulator

It has proposed baseline fund thresholds on taxonomy-eligible and ESG assets.

France’s financial regulator, the AMF, has called on EU authorities to review the need for minimum environmental standards for ESG funds in a statement issued on Monday.

Under the EU’s expansive Sustainable Finance Disclosure Regulation (SFDR) regime, fund managers must self-identify their products based on two tiers of ESG integration. The first, called Article 9, is for funds which prioritise ESG outcomes. Funds which merely count sustainability objectives among others are classed under Article 8.

However, the SFDR’s lack of minimum standards – a result of the regime being developed primarily as a disclosure mechanism – has raised red flags at a number of EU regulatory bodies, most recently from France’s Autorité des Marchés Financiers (AMF).

The European Securities and Markets Authority (ESMA), which oversees EU member state financial regulators, warned in a recent market risk commentary that the SFDR’s lack of standards and “the type of requirements usually attached to voluntary labels” could pose greenwashing risks to investors.

The EU financial regulatory trio, which includes the bloc’s banking and insurance supervisors along with ESMA, have also made a separate internal request for a detailed definition of the term “sustainable finance”, noting the likelihood of wide-ranging interpretations by asset managers and investors.

The AMF has backed the introduction of minimum environmental thresholds for ESG funds as a “first step” ahead of other sustainability-related considerations in line with the EU’s policy agenda, with more stringent requirements for Article 9 funds compared to Article 8 alternatives.

In addition, the regulator has proposed that Article 9 funds should include a minimum proportion of taxonomy-eligible assets, which could be increased over time as Europe transitions to a lower-carbon economy.

Binding requirements should also be put in place to ensure that fund managers only adopt “acceptable” ESG investment approaches which are pre-approved by EU authorities, the AMF said. Other potential areas identified for regulatory development include definitions for assets in transition and engagement strategies.

The French regulator said that the proposed changes “could be implemented very quickly in European law and would be a useful addition to the current regulatory framework”. It has raised the topic directly with EU financial services commissioner Mairead McGuiness, according to a statement.

In comments provided to Responsible Investor, a commission spokesperson said: “We are aware of the concerns expressed by national competent authorities and others that SFDR is in practice used as a de facto labelling scheme, raising concerns about potential risks of greenwashing.”

The commission acknowledged AMF’s proposals and said it would be among the issues considered in a “comprehensive assessment” of the SFDR’s implementation which is due to take place in 2023.

Separately, the French SIF has said that AMF’s proposals could be used to inform ongoing revisions to France’s Socially Responsible Investment label. A key priority is for the label to consistent with the SFDR regime and other European sustainable finance regulation, said the SIF, and should therefore “heed the requirements which have been proposed by the AMF”.