Industry Updates

Paris-aligned climate ETFs should be Article 9, ESMA advisory group says

Group advising ESMA on greenwashing says Article 9 has become a ‘null’ category

Theo Andrew

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Investors would be better protected from greenwashing if funds tracking Paris-Aligned Benchmark (PAB) and Climate Transition Benchmark (CTB) strategies were labelled Article 9 under Europe’s ESG regulation, a group advising the European Securities and Market Association (ESMA) has said.

According to the Securities Market and Stakeholder Group (SMSG), investors would benefit if funds classified as Article 9 under the Sustainable Finance Disclosure Regulation (SFDR) “were the sole carriers of a green classification” due to the current lack of minimal ESG requirements for Article 8 funds.

The group, which guides ESMA on its policy work, gave the advice after the European Supervisory Authority (ESA) launched a probe on greenwashing practices last November.

“Retail investors would be better protected from greenwashing if Article 9 funds were sole carriers of a green classification, such as strategies similar to CTB and PAB,” it said.

“Especially if accompanied by measurable engagement actions or impact-oriented objectives towards a green transition. Social and ethical funds and other ESG-intensive funds should also be able to be part of Article 9 classification.”

SMSG said Article 9 funds should focus on thematic, green or project bond funds, engagement funds and impact investing, all of which should be clearly defined.

Furthermore, it said Article 9 funds using an “engagement approach” should be allowed to invest in oil companies “to accelerate the green transition” if its engagement process is clearly detailed.

It noted the recent spree of asset managers downgrading their ‘dark green’ Article 9 ETFs to ‘light green’ Article 8 due to the “lack of clarity” of the regulatory framework.

Roughly 70% of ETFs classified as Article 9 under SFDR were downgraded to Article 8 ahead of the ‘level 2’ update on 1 January, according to Bloomberg Intelligence.

“Article 9 investments seem to have toughened from being a ‘niche’ category to almost a ‘no’ or ‘null’ category,” SMSG said. “The SMSG stresses the importance of establishing a framework with intelligible rules and guidelines from the start, in the absence of which it is difficult to come up with useable products.”

As a result, the group said ESMA should consider relaxing the 100% sustainable investment needed to qualify for Article 9, largely thought to be unattainable by the industry.

“For example, the Greenfin label in France requires 75% (not 100%) sustainable investments. If the threshold for ‘dark green’ funds, is set for example at 80%, it should still leave room for funds to hold some cash and adapt to different market situations,” SMSG said.

The group added it is important for ESMA to clarify ESG-related terminology such as “green”, “ESG” and “sustainable”, “impact investing” and “sustainable investing” to reduce greenwashing.

It comes as the ESA call for evidence on greenwashing closed on 16 January.

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