Clarity AI: 44% of funds hit by ESMA rules

Nearly half of funds with ESG and sustainable terms in their names may breach new EU regulations, says research from Clarity AI.

Clarity AI found that 44% of funds using ESG and sustainable terms may need to change their name or divest assets. This comes following the announcement of new ESMA rules applying to any EU fund using an ESG or sustainability-related term in its name. The rules say that an asset manager using a sustainability or ESG term must ensure that a minimum of 80% of assets are used to meet the environmental and/or social characteristics or sustainable investment objectives of the fund. The rules also state that there should be no exposure to assets that breach the PaB exclusions.

Clarity AI analyzed 3256 EU funds that have ESG or sustainable related terms in their names. Of those funds, the vast majority are Article 8 funds (74%) with Article 9 representing 19% and Article 6 just 7%. Nearly half (44%) contained investments in companies that breach the Paris Aligned Benchmark criteria. 28% have exposure to multiple companies in breach of the PaB exclusion criteria.

Clarity AI also found that in terms of breaches of the PaB exclusionary criteria, nearly half (49%) of Article 8 funds with ESG or sustainable-related terms contain investments in companies with breaches, and around a third of Article 6 (36%) and Article 9 (29%) funds.

Tom Willman, Regulatory Lead, Clarity AI, said, “ While much of the commentary has focused on meeting the 80% threshold of assets to achieve sustainability characteristics or a sustainable investment objective, we believe that applying the exclusions from the Paris-aligned benchmark regulation may be a tough task for much of the industry. Funds will need to collect data in order to ensure that they are not exposed to any assets involved in tobacco, controversial weapons, or breaches of global norms, and that fossil fuel related activities are limited and below a certain threshold.

The vast majority of the funds using related terms that are breaching the exclusion criteria are Article 8 funds. The limits imposed on fossil fuel-related activities are a key driver of these breaches. However, breaches occur across the board, including exposure to tobacco production and controversial weapons. These breaches are not isolated, as many funds were individually invested in multiple companies that violated the exclusion criteria.”