ESG asset growth could stall under regulatory scrutiny, Bank of America warns

Asset managers could be forced to refine ESG AUM figures

Theo Andrew

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The boom in environmental, social and governance (ESG) asset gathering could hit a stumbling block as global regulators intensify scrutiny of financial products amid greenwashing fears, the Bank of America (BofA) has suggested.

In a research note published last Thursday, the BofA said investors should be more cautious in labelling their products ESG in the face of a regulatory clampdown, adding it expects asset managers to temper their ESG assets under management (AUM) figures as a result of stricter definitions.

Last year was a record year for ESG inflows with the rise of products claiming to adhere to climate or ESG considerations reaching $1.7trn AUM by the end of 2020.

Globally, ESG funds AUM is growing at three times the rate of non-ESG funds, BofA said.

However, the scale of greenwashing in the asset management industry was laid bare last month after it emerged 71% of equity funds falling into the broad ESG category were misaligned with on the Paris Aligned Benchmark, according to research from think-tank InfluenceMap.

As a result, BofA said ESG AUM inflows could stall as regulatory oversight intensifies.

Menka Bajaj, EMEA ESG strategist at BofA, said: “Given the surge in ESG financial products, global regulators are ramping up the review of sustainability statements for compliance with current law.

“We believe investors should reconsider their ESG criteria and be more cautious when making claims about green/social investments in light of recent controversies around the overstated use of sustainable investing.

“Our asset management equity research team expects ESG AUM figures to be refined by all asset management players as regulation evolves.”

The warning comes as asset managers rush to label their products as Article 8 or 9 under the European Union’s Sustainable Finance Disclosure Regulation (SFDR).

However, the vague definition of Article 8 has led to some bemusement in the market due to the requirement for a fund to promote ESG characteristics. Last week, Sandro Perri, CEO of BNP Paribas Asset Management said “confusion” for investors could increase the risk of greenwashing.

The European Securities and Market Authority (ESMA) last week outlined new obligations for product disclosures under SFDR Article 8 and 9, potentially requiring firms to report key performance indicators against their objectives laid out in newly established pre-contractual disclosure documents.

Despite this, unclear definitions have led some national regulators to impose their own local rules on the minimum requirements for the marketing of sustainable funds, increasing the risk of regulatory divergence.

Last week, the UK government outlined plans for its Sustainable Disclosure Requirements (SDR) which will require every investment product to set out the environmental impact of the activities in finances and justify any sustainability claims it makes.

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