ESG Funds May Not Meet Sustainability Rules

Published on:
by KnowESG
KnowESG_ESG funds and regulation
Image courtesy of

Proposed legislation regarding non-financial disclosures and the naming of ESG funds lacks standardisation across the US, UK, and Europe. This will make it difficult for many funds that claim to be "sustainable" to adhere to the regulations.

An analysis of over 18,000 investment funds across Europe conducted by Clarity AI, a technology platform, has revealed that less than 4% of these funds would meet the naming laws for environmental, social, and governance (ESG) funds across key markets.

The study indicates that many of these funds would require renaming or restructuring if they intended to sell across the US, UK, and Europe, all of which have varying definitions and naming regulations for sustainability funds and non-financial disclosures.

Patricia Pina, the Head of Product Research and Innovation at Clarity AI, explained that funds with the word “sustainable” or similar terms, which belong to all three investment fund regimes, would need renaming or restructuring for them to be sold across all three markets. She also pointed out that the differences in how regulators interpret concepts such as ESG and sustainability are a significant cost of compliance.

In November 2022, the European Securities and Markets Authority (ESMA) initiated a consultation to set minimum thresholds on Article 8, which applies to “light green” funds that use ESG-related terms in their names.

ESMA suggested that these funds should ensure that 100% of the assets in each portfolio adhere to minimum safeguard thresholds aligned with the Paris Agreement. Additionally, it suggested that 80% of assets should be used to meet ESG-related characteristics, and 50% should be defined as sustainable under the Sustainable Finance Disclosure Regulation (SFDR).

Clarity AI’s study discovered that only 20% of Article 8 funds using the term “sustainable” had plans to comply with the recommendations of the consultation. The research suggests that the recommendations proposed by ESMA would not align closely with investing proposals in the UK or US.

Pina explained that this lack of standardisation in naming laws is not just an added compliance cost; it also underlines how different actors, in this case, regulators, interpret the meaning of core concepts such as ESG and sustainability.

For more regulatory news

Source: edie

To view and compare company ESG Ratings and Sustainability Reports across sectors, follow our Company ESG Profiles page.


Regulators Headlines

Novisto Raises $20M in Series B to Lead ESG Reporting

Novisto Raises $20M in Series B to Lead ESG Reporting

Philipa Varris Appointed as ESG Specialist at Mkango

Philipa Varris Appointed as ESG Specialist at Mkango

Sweep Rolls Out Solution for Sustainability Disclosure

Trevor Hutchings Appointed BIP Sustainability Partner

FTSE 100 Companies' ESG and Purpose Misalignment

EU's New Rules Alter Seafood Sustainability Reporting

Chaucer Appoints Simon Tighe as Group ESG Head

IBA Report: ESG's Impact on Capital Markets

CKGSB: Foreign Investment Boosts ESG of Chinese Firms

Sun Chemical's Spring 2023 Newsletter Released