A report released by the CFA Institute Research and Policy Center, the global association of investment professionals, has called for greater rigour in the classification of ESG funds.
The report critiqued existing ESG fund classification frameworks in the US, EU and UK, noting that these systems often suffer from vague definitions, a lack of focus on observable features, and incomplete structures for categorising funds. These issues, the researchers argued, lead to inconsistencies in how funds are classified, making it difficult for investors and industry participants to make informed decisions.
Chris Fidler, head of global industry standards, CFA Institute, said: “The ultimate test of a classification system is to have different evaluators classify the same set of funds. If they do it the same way, a good system exists. If different evaluators assign the same fund to different groups, revisions are required.”
To address these shortcomings, the report offers a more structured approach to ESG fund classification, centered on clear and measurable characteristics. It suggests that funds should be classified based on the presence of processes that incorporate ESG information to improve risk-adjusted returns, policies that control fund investors’ exposure and contribution to specific systemic ESG issues, and explicit action plans aimed at achieving specific environmental or social goals, with a means to measure progress. This approach, according to the report, provides a more transparent and logical framework that can help both regulators and industry professionals navigate the complexities of ESG fund classification.
EU ESG fund reclassifications likely delayed until 2025, data shows
The report is particularly useful for regulators shaping rules for ESG funds, as well as for industry participants looking to market or select funds that align with ESG objectives, according to the researchers.
Speaking on the UK’s Sustainability Disclosure Requirements (SDR), Fidler added: “SDR will give fund investors confidence that a sustainability labelled fund meets minimum standards set and enforced by the FCA. SDR will make it vastly easier for retail investors to identify funds that have a sustainability objective. For funds without a sustainability label, the markets still need a reliable way to distinguish between funds that use ESG information to make risk-return decisions and funds that take a policy position on specific ESG issues.”
On the EU’s Sustainable Finance Disclosures Regulation (SFDR), he said: “SFDR showed that conditional disclosures — for example, a disclosure that is made only when a fund has sustainable investment as its objective — gives rise to a de-facto classification system in the marketplace. This is not ideal because classification systems should be intentionally designed to meet a defined set of needs.
For funds without a sustainable or transition label, the markets still need a reliable way to distinguish between funds that use ESG information to make risk-return decisions and funds that take a policy position on specific ESG issues.”
