Quarter of Article 8 funds face ‘greenwashing risk’

In its 2024 ESG Barometer report, the firm, part of Allfunds Group, noted the proportion of Article 8 funds at risk of greenwashing had increased in recent years, from 21% and 20% in 2021 and 2022, respectively, up to 24% last year.

It said the main reason for this was that the vehicles have done “close to the bare minimum to classify as an Article 8 product”, such as holding few negative exclusions or enforcing basic ESG integration, leading to ESG standards not being “strong enough”.

For Article 9 funds, just 6% face the same risk, the firm found.

The spotlight on greenwashing risks also came as the number of Article 8 products increased by 20% year-on-year in 2023, compared with a 24% drop in Article 6 funds.

Looking at the whole funds universe, the company found the term ‘sustainable’ was more common among asset managers, with 684 strategies featuring it, followed by ‘ESG’, which was present in 631 products.

MainStreet explained that the word ‘sustainable’ was also more likely to be used for active funds, whereas ‘ESG’ was more common among ETFs.

However, the company noted the adoption of Scope 3 emissions within investment processes has remained “limited”, with only two areas “explicitly considering the supply chain of companies”: Article 8 European bonds and small- and mid-cap European equities.

Although MainStreet noted Scope 3 disclosures are “prevalent” across the market, it found a “significant gap” between the availability of the data and its integration into the investment decision-making process.

In the report, the company also turned the spotlight on private assets, as the growth in the size of this market is expected to lead to an increased demand for ESG assessments, as ESG integration becomes increasingly important for high-carbon-emitting sectors, including infrastructure and real estate.

Neill Blanks, managing director at MainStreet Partners, said: “2023 was a challenging year for asset managers on many fronts, including responding to regulatory changes in sustainable investing, such as the FCA’s recently released Sustainable Disclosure Requirements.

“In helping asset managers to anticipate the needs of investors, we urge them to look beyond company operational sustainability to understand how companies play into global ecosystems. This can provide clarity on supply chain resilience or exposure to ESG-related issues, as well as identify companies with business models that challenge the status quo.”

He added: “It is through actions like this that asset managers can meet their regulatory obligations, and – importantly – identify and avoid allegations of greenwashing.”