Clarity AI has published new analysis showing that 95% of ESG funds falling under US, UK, and EU regulations would require renaming or restructuring in order to be sold across all three markets.

In November 2022 the European Securities and Markets Authority (ESMA) proposed that any Article 8 fund using an ESG-related term in its name would need to ensure that:

• 100% of the assets it invests in adhere to minimum safeguards by following the minimum exclusion criteria outlined in the Paris-aligned benchmark regulation.
• 80% of the assets it invests in are used to meet the ESG-related characteristics that it promotes (i.e. aligned with the terms in the name).
• 50% of the assets it invests in are sustainable investments as defined under Article 2(17) of SFDR, if the fund uses the term “sustainable” or any derived term (e.g. “sustain”) in its name.

Clarity AI examined these proposals, drawing on data from over 18,000 funds across Europe. They looked at the planned and actual (via Clarity AI’s own data) level of sustainable investment in different Article 8 funds. They found only 20% with the term sustainable (or a derivative thereof) currently plan to make sustainable investment of over 50% as outlined by ESMA.

Clarity AI say these funds would therefore fall short of the proposed amendments. Furthermore, for sustainable investment made by Article 8 funds with “sustainable” in their names, 20% plan to make less than 10% sustainable investment. Moreover, they say the proposal from ESMA does not appear to align particularly closely with either of the proposals from the UK or the US.

Patricia Pina, Head of Product Research and Innovation at Clarity AI, says, “Although each jurisdiction might have contextual differences worth taking into account, capital markets are global markets and we need stronger regulatory alignment across borders. Understanding and characterizing ESG and sustainability differently will only contribute to increasing the existing confusion in the market and potentially result in ‘greenwashing,’ which is exactly what these regulations aim to fight.”