European ESG funds face a record number of closures as greenwashing scrutiny intensifies and the allure of higher fees diminishes, data shows.
With 51 closures of ESG-listed European funds in the second quarter, this period witnessed an all-time high. The net increase of only 32 new ESG funds, resulting from 51 closures and 83 launches, contrasts sharply with past years.
In 2022, asset managers consistently introduced over 100 European ESG funds per quarter. Data from Morningstar Benelux reveals that as many as 182 new ESG funds were shelved in the final quarter of 2021.
Previously steady growth in ESG-labelled funds, reflecting the rising demand for socially responsible investing, appears to have reached its zenith. Increasingly, regulators are casting a closer eye on fund labels, penalising misleading or overblown ESG claims.
«The big advantage of ESG funds - the ability to charge a higher fee - no longer compensates for the reputational risks and the danger of mislabelling,» says Anne Lafarre, a sustainability pledge researcher for asset managers at Tilburg University.
She also observed, «Due to newer legislations, greenwashing isn’t as easy. It’s gradually becoming a less favoured business strategy.»
The Name Rule
Last month, the Securities and Exchange Commission (SEC) in the United States debuted the «Name Rule.» This regulation mandates funds with an «ESG-related» title to allocate a minimum of 80 percent of assets in line with that descriptor.
Meanwhile, the European Securities and Markets Authority (Esma), the European regulatory body, suggested a similar rule the past November. However, the definitive guidelines on labelling sustainable and ESG funds remain unpublished.
Consequently, fund providers are keen to modify fund names. This year alone, the term ‹sustainable› was deleted from 44 fund names, as per a Financial Times report based on Broadridge consultancy data.
In the Netherlands, ABN Amro excised ‹sustainable› from 14 fund names in January. A spokesperson noted the bank is waiting for «clearer directives» from Esma concerning the term’s usage in fund titles, as cited by the British business paper.
US leads, Europe follows
Anticipating stricter regulations, the US witnessed a higher number of sustainability-labelled fund closures this year than in the preceding three years combined. In Europe, only 166 ESG-tagged funds were introduced this year, which is below half of the first two quarters of 2022, which totalled 330.
More than half of Europe’s total assets, equivalent to €6,000 billion as per MSCI data, are tied up in sustainable funds. However, net inflows dipped in the last quarter. Sustainable open-end funds and ETFs in Europe attracted just €53 billion in the first half of 2023. Last year, this category achieved this figure in the opening quarter alone, based on Morningstar Benelux data.
ESG promises vanish
Lafarre points out a growing debate surrounding ESG as an umbrella term. «For eco-conscious beneficiaries, it’s uncertain if supporting every ESG initiative truly benefits their interests,» she commented.
US politics› increasing polarisation, marked by numerous states adopting anti-ESG laws, amplifies this issue. Lafarre’s thorough analysis of asset managers› dedication to sustainability is ongoing. Yet, she’s already noticing signs of shifting moods.
«Consider BlackRock’s corporate website’s landing page, archived on the WayBackMachine. A comparison of the 2021 and 2022 versions with the current one reveals the conspicuous absence of net-zero commitments,» Lafarre highlighted.
Earlier this year, BlackRock’s CEO Larry Fink eschewed the term ‹ESG,› arguing it has grown «overly political.» He now discusses investments «associated with the shift to a low-carbon economy.»
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