A recent update of a Luxembourg sustainable finance report notes that two-thirds of the assets under management of Luxembourg UCITS – 2.8 trillion euros at the end of June 2023 – report under one of the two designations set out by European rules for green investing. However, mention of investment-related greenwashing is conspicuous by its relative absence in the report.
In the background of most discussions about sustainable investing is concern about greenwashing, which has led to significant regulatory interest, with proposed UK legislation aiming explicitly to diminish misleading sustainable investments. However, this is not the case with this report, which examines how companies use the legislation, explained in the report as an attempt «to periodically map new dimensions and indicators available to measure and track the progress of sustainable finance across financial sectors over time.»
“The study provides data with regards to the applied investment strategies at product level and, at entity level, information on PAIs (principal adverse impacts) or the adherence to climate initiatives and tools by FMPs,” said Nicoletta Centofanti, CEO of the Luxembourg Sustainable Finance Initiative (LSFI), in an interview. The LSFI report is called “Sustainable Finance in Luxembourg 2023: An expanded overview.”
No response
While the study’s release came as the EU wraps up a consultation on the SFDR, Centofanti told Investment Officer that while the LSFI doesn’t “respond to consultations”, she said, “we believe the findings of this study can be useful for many sustainable finance players such as regulators and supervisors.” She said the study primarily targets Luxembourg financial professionals.
The study uses an analytical approach based on its finding that there are three sub-strategies adopted by ESG funds – “Involvement”, “Exclusion” and “Screening”.
“Investment strategies inform the investors about the plan that the fund is going to follow to achieve certain objectives and provide a framework for making investment decisions,” said Centofanti, who noted the report was helpful in “providing granular information on asset classes, geographies or performance, among others.”
Some sensitivity
The report noted that last year, there was an increase in funds reporting under Article 8 but a decrease in those doing so under Article 9. During the presentation, it became clear there is some sensitivity over how this one speaks about this.
“You’ll recall certainly that at the end of last year, there had been a number of shifts of funds disclosing under Article Nine, which then have been — and Nicoletta will look at me in a not very nice way,” said Frédéric Vonner, a PwC Luxembourg advisory partner for sustainable finance. “Don’t say that word, don’t say that word,” said Centofanti. “So it’s not a classification change, but it’s a shift in the disclosures that those firms are looking into,” continued Vonner.
Centofanti was evidently quite proud of the work that went into the report, which features “additional dimensions” for “the first time that are looked at in so much detail in a granular way.”
Everyone concerned
Investment Officer put the greenwashing question to Vonner, who said that “everyone” is concerned about greenwashing. He added that he doubted that greenwashing is “voluntarily done.»
“I think the risks of greenwashing – I think we are more talking about risks here than anything else – are more embedded into certain details, the complexity of implementation of such regulations, the divergence that you might have between investor expectations, on one side, the actual commitments that are done by certain asset managers, on the other side.”
If one event made clear the dark side of sustainable investing, it was the US financial regulator fining Deutsche Bank’s asset management subsidiary DWS 25 million dollars over failings that included a mismatch between the firm’s promises and its actual ESG practices. Morningstar has echoed industry concerns over the “uneven” introduction of the EU’s sustainable finance regime in describing the sector as facing “The Great Reclassification.”
Regulatory divergence
This is made even more complex by the divergence between European regulators and their national counterparts over whether natural gas and nuclear energy can be regarded as sustainable transition fuels.
Going back to the timing of the study, one of the key pieces of sustainable investment legislation is the EU’s Sustainable Finance Disclosure Regulation, which sets out how financial market participants must disclose sustainability information to help investors who seek to put their money into companies and projects make informed choices.
This trailblazing piece of legislation is the subject of an EU review process but has also served as an example to be improved upon for the UK as it drew up its Sustainability Disclosure Requirements (SDR) rule.
A key differentiator between the two pieces of legislation was the UK’s decision to include a labelling regime. The European Commission permits using “light green/ESG” for Article 8 and “dark green/impact” for Article 9, but is not yet a labelling regime. The UK’s FCA has proposed an investment labelling regime including three labels: “Sustainable Focus”, “Sustainable Improvers” and “Sustainable Impact.