Surge of ESG products

The demand for ESG funds in 2021 surpassed expectations. Many asset managers will consider recategorising their non-ESG funds into the Article 8 (light green) or Article 9 (dark green) disclosure regimes under the EU SFDR in 2022. However, the current use of these regimes as labels may be set to change as the market becomes more sophisticated and recognises the broad range of funds within Article 8, some of which are very green, others less so. The conversation will move to the substance of these funds, which will be revealed when the long-overdue detailed Level 2 RTS comes into effect and quantitative and other detailed disclosures will be made public. Article 8 itself won’t be enough: it’s the substance that will matter. This shift away from Article 8 as a label will be accelerated by the MiFID sustainability preferences assessments, a significant change to European fund distribution from August 2022. These assessments do not use the Article8/Article 9 categorisations, but instead focus on substance - % commitment to sustainable investments; % commitment to environmental taxonomy alignment or whether the fund considers the adverse impacts of its investments. Data availability and quality remains a key challenge, and supply of data is still playing catch-up to the needs of managers. ESG investment processes that are heavily reliant on data may need to reassess the quality of their inputs. Beginnings of regulation of data providers will be welcomed by many. Data limitations and product categorisation are not without risk, with increasing trends of stakeholders and regulators seeking to hold asset managers to account for the integration of ESG into investment decisions.

Asset Management & Investment Funds