Nearly a quarter of funds classified as Article 9 under SFDR are failing in the regulation’s requirement to do “no significant harm”, according to new research.
An analysis of 750 Article 9 funds by Clarity AI – a sustainable investing tech provider – found many were falling short in terms of sustainability investments.
Of this sample, nearly a quarter – or 18% – had greater than 10% exposure to companies in violation of UNGC Principles or the OECD guidelines for multinational enterprises.
A further 21% of funds had exposure of between 5-10% in these companies.
In total, investments in 166 companies in violation of these principles were found. These violations can include anti-competitive practices, corruption convictions, and negative environmental impacts.
Similar failings were seen in regard to fossil fuel exposure.
Of this sample, 18% had between 5-10% exposure to fossil fuel companies, with 9% having over 10% exposure.
Here, investment in 1,250 companies producing or participating in fossil fuel production was identified.
Rather than being evidence of outright greenwashing, Clarity AI has concluded these failings were to do with challenges around the European ESG Template (EET).
Supporting this, research revealed evidence of poor disclosure levels among fund managers.
“The continuous cadence of Article 9 downgrades to Article 8 signals that fund managers are not deliberately misleading investors,” Clarity AI added in its commentary.
“It suggests that the market initially approached the gaps and uncertainty in the regulation in different ways, but that currently, the industry is adjusting to incorporate the new guidance published by regulators.”
Of the 43 Article 9 funds reporting granularly in line with EET, 42% reported zero exposure to companies violating UNGC principles or OECD guidelines violations.
Despite this, Clarity AI found 25 of these strategies were invested in at least one company involved in such a violation.
The most recent data, as of August 2022, shows Article 8 and 9 strategies held a combined $4.18 trillion in AUM.
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