MainStreet Partners: ESG Barometer report reveals 70% of European funds not sustainable
MainStreet’s first ESG Barometer report analyzes the state of ESG integration in European funds, following the progress made since Europe’s Sustainable Finance Disclosure Regulation (SFDR) came into effect one year ago, on March 10. It shows that 70% of funds still do not present sustainability into their investment strategy and they are classified as Article 6 for the SFDR. The remaining funds are classified as Article 8 for the 25% and as Article 9 for only 5%.
The European Sustainable Finance Disclosure Regulation (SFDR) has given a great boost to ESG integration in Europe providing a universal identification and disclosure framework for sustainability risks. In particular, it requires to funds’ financial products providers to classify them as Article 6, when they do not integrate ESG factors into the investment process but aware of the impact of ESG risks on returns, as Article 8, when they promote environmental or social characteristics, or as Article 9, when they have a specific sustainable objective.
According to Simone Gallo, Managing Director of MainStreet Partners, the company’s aim is “to produce a statistically robust, easy-to-understand and consistent sustainability ratings for investors”. Therefore, the company developed a proprietary methodology based on a three-pillar approach to show where progress has been made and where more needs to be done. The three pillars are an overall consideration on the fund and portfolio managers team, investment strategy and portfolio assets.
In the ESG Barometer first edition, this approach is used to analyze progress made after the SFDR came into effect. It allows to reach important conclusions about the current ESG integration of European funds. In particular, the research is based on the firm’s proprietary ESG database created in 2014, which has 4,200 funds/ETFs and over 50,000 individual ISINs covering 160 asset managers and representing €5,6 trillion in assets.
Firstly, more than 70% of funds are classified as Article 6, while only 25% are classified as Article 8 and 5% as Article 9. Nevertheless, the analytics firm expects that a significant portion of new strategies launched this year will be classified as Article 8 over the coming quarters. However, around a fifth of Article 8 funds achieve an ESG rating of three (out of five) or below, mainly due to the Pillar 2 and 3.
Considering the different funds sizes, the research shows that medium and large asset managers rate higher than boutiques for the first pillar (asset manager). They have more resources allocated to ESG integration, adopt ESG earlier and demonstrate active engagement and voting practices. On the other hand, boutiques outperform medium and large firms for the second (strategy) and third (portfolio) pillar. They present more innovative and specialized strategies and invest more in securities with higher ESG ratings. Moreover, It is interesting to note that multi-asset funds has a lower degree of ESG integration in their investment objectives.
Turning to a thematic point of view, the ESG Barometer states that most Article 9 funds are focused on environmental themes, while social themes are chosen by just 7% of funds. This is a consequence of many regulatory trends focused on achieving various net zero targets.
In conclusion, the SFDR introduction resulted in a significant boost in ESG European funds ratings, although it is possible to identify at least two areas for improvement, as confirmed by Simone Gallo. Firstly, it is necessary that asset managers continue their work in transition investment processes and strategies to guarantee a higher alignment between the SFDR Article labels and ESG ratings. Otherwise, there is a risk that accusations of greenwashing will become more credible. Secondly, there are still weaknesses in assessing the degree of genuine ESG integration due to the diversity of products available and the absence of a single standard for ESG-aligned products.
SOURCES:
https://assets.foleon.com/eu-west-2/uploads-7e3kk3/47575/mainstreet_report_v17.dd2da8b3a85f.pdf
https://www.investmentweek.co.uk/news/4044345/mainstreet-report-reveals-funds-sustainable
Author: Marianna Cacace
MainStreet Partners: ESG Barometer report reveals 70% of European funds not sustainable
MainStreet’s first ESG Barometer report analyzes the state of ESG integration in European funds, following the progress made since Europe’s Sustainable Finance Disclosure Regulation (SFDR) came into effect one year ago, on March 10. It shows that 70% of funds still do not present sustainability into their investment strategy and they are classified as Article 6 for the SFDR. The remaining funds are classified as Article 8 for the 25% and as Article 9 for only 5%.
The European Sustainable Finance Disclosure Regulation (SFDR) has given a great boost to ESG integration in Europe providing a universal identification and disclosure framework for sustainability risks. In particular, it requires to funds’ financial products providers to classify them as Article 6, when they do not integrate ESG factors into the investment process but aware of the impact of ESG risks on returns, as Article 8, when they promote environmental or social characteristics, or as Article 9, when they have a specific sustainable objective.
According to Simone Gallo, Managing Director of MainStreet Partners, the company’s aim is “to produce a statistically robust, easy-to-understand and consistent sustainability ratings for investors”. Therefore, the company developed a proprietary methodology based on a three-pillar approach to show where progress has been made and where more needs to be done. The three pillars are an overall consideration on the fund and portfolio managers team, investment strategy and portfolio assets.
In the ESG Barometer first edition, this approach is used to analyze progress made after the SFDR came into effect. It allows to reach important conclusions about the current ESG integration of European funds. In particular, the research is based on the firm’s proprietary ESG database created in 2014, which has 4,200 funds/ETFs and over 50,000 individual ISINs covering 160 asset managers and representing €5,6 trillion in assets.
Firstly, more than 70% of funds are classified as Article 6, while only 25% are classified as Article 8 and 5% as Article 9. Nevertheless, the analytics firm expects that a significant portion of new strategies launched this year will be classified as Article 8 over the coming quarters. However, around a fifth of Article 8 funds achieve an ESG rating of three (out of five) or below, mainly due to the Pillar 2 and 3.
Considering the different funds sizes, the research shows that medium and large asset managers rate higher than boutiques for the first pillar (asset manager). They have more resources allocated to ESG integration, adopt ESG earlier and demonstrate active engagement and voting practices. On the other hand, boutiques outperform medium and large firms for the second (strategy) and third (portfolio) pillar. They present more innovative and specialized strategies and invest more in securities with higher ESG ratings. Moreover, It is interesting to note that multi-asset funds has a lower degree of ESG integration in their investment objectives.
Turning to a thematic point of view, the ESG Barometer states that most Article 9 funds are focused on environmental themes, while social themes are chosen by just 7% of funds. This is a consequence of many regulatory trends focused on achieving various net zero targets.
In conclusion, the SFDR introduction resulted in a significant boost in ESG European funds ratings, although it is possible to identify at least two areas for improvement, as confirmed by Simone Gallo. Firstly, it is necessary that asset managers continue their work in transition investment processes and strategies to guarantee a higher alignment between the SFDR Article labels and ESG ratings. Otherwise, there is a risk that accusations of greenwashing will become more credible. Secondly, there are still weaknesses in assessing the degree of genuine ESG integration due to the diversity of products available and the absence of a single standard for ESG-aligned products.
SOURCES:
https://assets.foleon.com/eu-west-2/uploads-7e3kk3/47575/mainstreet_report_v17.dd2da8b3a85f.pdf
https://www.investmentweek.co.uk/news/4044345/mainstreet-report-reveals-funds-sustainable
Author: Marianna Cacace
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