‘Practically impossible’ for funds to align with all European sustainable investment labels, says report

This article has been updated to correct some figures after an updated paper was published by the report authors.

It is “practically impossible” to design an investment product which is aligned with every major European sustainable investment label, according to a new report from Qontigo.

The report analysed 12 sustainable labels including the French SRI label, Germany’s FNG label and the proposed EU Ecolabel, finding that the thresholds a product would need to meet in order to align with all major European labels are “unrealistically high”. The authors say that this implies “a one-size-fits-none situation” and “a common EU market in name only”.

While most labels require the exclusion of controversial weapons and companies in breach of the UN Global Compact principles, there is significant divergence in other exclusions areas. 60% of the labels require the exclusion of unconventional oil and gas, while 80% require screens for thermal coal, with little standardisation over revenue thresholds for exclusion.

The report says that if a product was to meet the requirements of all the labels, it would have to exclude any company with revenue from tobacco production, or over 5% revenue from nuclear power or fossil fuels, with additional restrictions around land acquisition and management, waste management, genetic modification, hazardous chemicals, asbestos, tobacco distribution, cloning, gene therapy, weaponry and non-electric passenger vehicles.

Beyond exclusions, alignment with EU standards is also a source of divergence. The EU’s proposed Ecolabel will rely on the taxonomy, while Luxembourg’s label requires alignment with articles 8 and 9 of the EU’s Sustainable Finance Disclosure Regulation (SFDR). Given that the definition of sustainable finance is broader under the SFDR due to the inclusion of socially themed investments, this may lead to misalignments, the report says.

In addition, the regulation for the EU’s climate transition benchmark and Paris-aligned benchmark products specifies ESG disclosure obligations which are not aligned with ESG data reporting required by the SFDR.

All analyzed labels also include minimum performance standards for portfolio construction, but there is significant divergence on what criteria are included. Seven of the labels, including the EU Ecolabel draft rules and the Belgian Towards Sustainability label, specify that engagement is mandatory or desirable.

The failure to create basic common ground between sustainability standards “will only deepen the issue of greenwashing”, the report says, warning that funds may continue to be channelled into investments which do not meaningfully contribute to Net Zero or achieving the UN’s Sustainable Development Goals. Difficulty in designing products which are eligible for sustainability marks in multiple countries may also slow down the mainstreaming of sustainable investment by making it more difficult to scale products and easily replicate them across borders.

In order to solve this problem, the report suggests that all labels could eventually align around the disclosure of financed activities aligned with the EU Taxonomy’s definitions of environmentally and socially sustainable investments. It also cautions that the introduction of new standards and labels by the EU could be counterproductive, given the existing misalignment between the EU’s existing legislative initiatives.

As reported by RI last year, there are major concerns that national ESG labels and guidance or rules around disclosure will lead to fragmentation in how the EU SFDR rules are interpreted and implemented. To help address this, the European Commission has said it plans to introduce minimum sustainability criteria under the SFDR.