According to new research that Reuters refers to, investment funds that represent themselves as sustainable funds under European laws generate comparable amounts of “green income” from the firms in which they invest.
The percentage of revenues earned by items that help the environment, such as cleaner water, or contribute to climate change mitigation is referred to as “green revenue.”
Clarity AI, a BlackRock-owned sustainability data technology platform, examined 31,000 funds to see how they stack up against a new European Union categorization system that establishes a list of ecologically sustainable economic activities. According to their data, just 3.6 percent of worldwide sales are “green.”
Fund managers can categorize their products according to the extent to which they promote environmental, social, and governance goals under the European Union’s Sustainable Finance Disclosure Regulation.
They can sell themselves as either Article 8, which implies that they are totally or partially focused on environmental, social, or sustainability concerns, or as a more strict Article 9, which means that they are completely focused on sustainable aims.
Investments classified as Article 6 by fund managers indicate that they do not prioritize sustainability.
Clarity discovered that 3.9 percent of the income generated by portfolio firms owned by Article 8 funds may be classed as green, equivalent to the 3.1 percent share for Article 6 items.
Green revenue accounted for 15% of revenue in the smaller pool of Article 9 funds.
“Article 8 funding is defined as “enhancing E or S features,” which is a very ambiguous expression. As a result, the market is frequently interpreting this word by including a very light touch of sustainability-related concerns into their strategy “Clarity AI’s Head of Product Research & Innovation, Patricia Pina, said Reuters.
While new and still-developing EU regulatory standards have been lauded for attempting to promote transparency in the fast-growing sector of ESG finance, ambiguous terminology can lead to managers loosely interpreting their funds’ sustainability credentials.
Morningstar, which regularly monitors the funds sector, revoked more than 1,000 funds of their ESG label in its categorization system earlier this year after discovering they did not live up to their sustainability claims.