Nearly half, 44 per cent, of funds with environmental terms in their names may be breaching new EU regulations, according to research by Clarity AI.
Clarity AI analysed 430,000 global funds and found 3,256 EU-domiciled funds that contained environmental or impact elements in their names.
According to the research, 44 per cent of these funds invest in companies that violate the Paris Aligned Benchmark (PaB) criteria, with 28 per cent subject to numerous violations and will therefore need to change their name or divest assets.
Clarity AI analysed whether these funds are invested in sectors excluded by PaB rules, like fossil fuels, tobacco, and companies with high energy use. It found that many funds breached criteria due to fossil fuel activities, tobacco production, and controversial weapons, often involving multiple companies.
The new ESMA rule requires any EU fund with ESG or sustainability-related aspects in its name to show that at least 80 per cent of its assets match the fund’s environmental or social objectives and excludes assets that breach PaB exclusions.
Guidelines released on May 14 will take effect three months after they are posted on ESMA’s website, giving existing funds six months to comply.
Clarity AI regulatory lead Tom Willman says: “While much of the commentary has focused on meeting the 80 per cent threshold of assets to achieve sustainability characteristics or a sustainable investment objective, we believe that applying the exclusions from the Paris-aligned benchmark regulation may be a tough task for much of the industry.
“Funds will need to collect data in order to ensure that they are not exposed to any assets involved in tobacco, controversial weapons, or breaches of global norms, and that fossil fuel-related activities are limited and below a certain threshold.
“The vast majority of the funds using related terms that are breaching the exclusion criteria are Article 8 funds. The limits imposed on fossil fuel-related activities are a key driver of these breaches. However, breaches occur across the board, including exposure to tobacco production and controversial weapons. These breaches are not isolated, as many funds were individually invested in multiple companies that violated the exclusion criteria.”
