SDG funds no more aligned with UN goals than non-SDG funds, finds ESMA

Financial watchdog questions whether funds claiming to contribute to the SDGs are fulfilling their investor promises.

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Funds claiming to contribute positively to the UN Sustainable Development Goals (SDG) are no more aligned with them than those that do not, a study by the European Securities and Markets Authority (ESMA) has found.

The research, based on Morningstar data on portfolio holdings as of December 2022, looked at 187 actively managed equity, bond or mixed investment funds domiciled in the EU.

The funds either stated that they were positively contributing to the SDGs or provided specific metrics on how their investment criteria align with them.

The watchdog then assessed the exposure of these funds to companies that are part of the UN Global Compact (UNGC), a voluntary initiative that supports the SDGs. This was benchmarked against the exposure to UNGC participants of funds that did not make any claims around the SDGs.

The methodology was chosen because of the broad scope of the UNGC, a spokesperson for ESMA told Responsible Investor. At the time of analysis, more than 21,000 companies were covered by the initiative.

The spokesperson noted, however, that it is only one of the possible frameworks to assess alignment of SDG funds. “The study does not intend to stipulate that companies which are not part of the initiative cannot also contribute to the SDGs,” they said.

UNGC exposure

ESMA’s study concluded that SDG funds do not differ significantly to non-SDG funds in terms of their exposure to assets issued by UNGC participants.

While the average exposure to UNGC companies was slightly higher for SDG funds in terms of assets (45.1 percent vs 44.3 percent non-SDG funds), the exposure was lower by share of AUM (46.9 percent vs 48 percent non-SDG funds).

When compared with funds under the EU’s Sustainable Finance Disclosure Regulation (SFDR), both Article 8 and 9 funds were found to have greater exposure to UNGC companies than SDG funds.

In addition, SDG funds did not perform better on average than their non-SDG counterparts in terms of the Principal Adverse Impact (PAI) indicators relevant to the different SDGs of the sampled funds.

SDG funds were also found to have more than 50 percent higher Scope 3 emissions than their non-SDG counterparts.

Based on these results, ESMA queried whether funds claiming to contribute to the SDGs are fulfilling their promises to investors.

The watchdog also questioned firms’ motives for joining the UNGC. It noted that most participants joined after 2020, at a time of increasing scrutiny around contributions to the sustainable transition and potential negative impacts on the environment and society.

Firms could view the initiative as an opportunity to reduce potential public scrutiny regarding their sustainability profile, the regulator wrote, “without needing to take steps to ensure their actions reflect their public commitment”.

The broad scope of the SDGs and the lack of a standardised definition or specific requirements mean these funds can be particularly prone to “impact-washing”, it added.

ESMA also discussed impact-washing risks, including the misuse of SDGs, as a key issue in its report on greenwashing last year.

The financial watchdog maintained, however, that it is “crucial” that SDG products remain “credible and attractive”, given the vast financial resources required for sustainable development.

It suggested that market mechanisms and clear rules need to ensure that sustainability frameworks are not misused.

Funds claiming that they are making positive contributions to the SDGs should show an “active and careful evaluation and selection of assets” that have been proven to contribute concretely to specific SDGs, the report added.