A majority of the more than 2,000 European ESG-labelled funds have reported no alignment with the EU taxonomy, while those that do have very low alignment on average, according to research from Novethic, a subsidiary of Caisse des Dépôts Group.
Novethic’s research, based on Morningstar data, found that a majority of funds (93 percent) do not have any minimum portfolio taxonomy alignment commitments, including 331 funds which are classified as Article 9.
It comes as Morningstar’s latest Sustainable Financial Disclosure Regulation (SFDR) overview report found that only 28 percent of Article 9 funds plan to make taxonomy-aligned investments.
Under SFDR, Article 8 funds are those that promote environmental or social characteristics, while Article 9 ones must pursue environmental or social objectives.
The European ESG fund market has seven main labels: France’s SRI and Greenfin labels, Germany’s FNG-Siegel, Luxembourg’s LuxFlag, Belgium’s Towards Sustainability, Austria’s Umweltzeichen and Nordic Swan.
Of the 2,071 funds studied, most reported no taxonomy-alignment at all. Novethic analysed the average level of taxonomy-alignment for the 367 funds that published a value greater than zero.
LuxFlag ESG funds were the least aligned on average, with the taxonomy at 3.6 percent. SRI-labelled products had 5.6 percent alignment, Towards Sustainability 7.3 percent and FNG-Siegel 9.1 percent. Nordic Swan had the highest level of alignment at 10.1 percent.
For funds with multiple labels (111 funds), the average score was 9.2 percent.
Despite significant outflows in 2022 across the EU fund market, however, labelled funds saw €28 billion in allocations, of which half (€14 billion) was invested in SRI-labelled funds.
Novethic said the significant allocations to ESG-labelled funds reflects the “large gap” between supply and demand for these types of funds.
It added that the low level of compliance with taxonomy criteria is “disappointing”, as labelled funds are “supposed to guarantee environmental and even social qualities”.
Many of the European labels have or are in the process of revising their criteria for stronger frameworks.
France’s SRI label has undergone a controversial two-year long review, and its Greenfin label committee is looking at integrating taxonomy criteria into its framework next year.
Meanwhile, Belgium has just adopted the third iteration of its label, due to be enforced from January, and the Austrian label committee has announced plans for a review for the first time in four years.
SRI label
The French SRI label, which has undergone more than 18 months of consultation, is in its final phase of approval with the ministry of finance, which ordered its revision.
However, while the label was due to be finalised in September, it has now been pushed back to November as the proposal has still not been approved by the ministry due to ongoing debates on setting demanding criteria for the oil and gas sector.
Lara Cuvelier, sustainable investments campaigner at French NGO Reclaim Finance, told Responsible Investor that investors and the fossil fuel industry lobbyists are pushing to weaken the criteria, arguing that “companies developing new unconventional fossil fuel projects must not be excluded”.
She added that the proposed criteria are “already less ambitious than other labels”. If they are weakened further, she said, “the label will have practically no meaning at all”.
This issue has also been raised by the French SIF, which was formerly a member of one of the label’s subcommittees but left in March citing concerns about the label’s revisions and level of ambition.
An opinion poll carried out for Reclaim Finance found that the majority of those questioned opposed the inclusion of companies investing in new oil and gas projects in the label.
The final consultation, which ended in June, saw investors call for an explicit alignment of the label to EU regulation, including SFDR and the EU taxonomy.
The latest framework proposed additional requirements for the label, including double materiality, in line with the demands of SFDR. It also recommended that funds be required to measure the effect of their investments on ESG by considering the principal adverse impacts.
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