Fund managers face disrupted flows into EU amid ESG overhaul

investmentnews.com:

Asset managers selling funds into the European Union risk having client flows “meaningfully” disrupted as regulators in the bloc consider a major overhaul of ESG investing rules, according to analysts at Barclays Plc.

The EU Commission opened the door to a wholesale review of the Sustainable Finance Disclosure Regulation last month, when it launched a consultation that has industry insiders bracing for years of upheaval. According to Mairead McGuinness, the EU’s commissioner for financial markets and services, the goal is to ascertain whether SFDR is in fact “fit for purpose.” 

The development means there’s a very real possibility the bloc will introduce an ESG fund labeling framework that would mark a departure from the current setup, according to Barclays analysts Scott Gordon and Maggie O’Neal. 

The introduction of formal ESG fund labels could have a “meaningful” impact across “controversial and high-emitting sectors, and sustainability leaders,” the analysts wrote in a client note.

SFDR currently requires asset managers to split funds into three ESG categories: Article 6 (ESG goals aren’t deemed relevant), Article 8 (ESG is promoted) or Article 9 (ESG is made an objective). There are close to $6 trillion in funds “of various quality levels” registered as Article 8, “affecting the clarity and credibility of the system,” according to Bloomberg Intelligence analysts Clelia Imperiali and Adeline Diab. 

Stricter rules around the current Article 8 universe “could impact investment flows meaningfully,” Gordon and O’Neal said. “An official fund label would likely come with minimum standards and stricter rules on holdings and exclusions.”

SFDR was adopted in 2019 and enforced two years later. It was hailed as the gold