Most sustainable funds not aligned with EU taxonomy, says new report

July 24, 2023|Written by

Most European funds marked as sustainable are not aligned with the EU taxonomy due to a lack of disclosures, a report from research firm MSCI has found.

The amount of disclosure data available is low, giving fund selectors “a limited pool of options to invest in, which may be challenging for mandates that require a minimum level of EU taxonomy alignment while balancing diversification needs,” the report found.

The data shows that few companies have provided information about how their funds align with the EU’s taxonomy. As a result, more funds could be classed as sustainable, but the lack of disclosure makes full analysis impossible.

The EU taxonomy is a classification system to help investors identify sustainable investments in a bid to increase transparency and tackle greenwashing in the industry. Under the taxonomy, companies are asked to disclose how much of their revenue is aligned with its principles. Fund managers can use that data to disclose the alignment of their portfolios.

MSCI found only 1.9% of article 8 and 9 funds had reported EU taxonomy-aligned revenue, with most reporting no aligned revenue. Article 8 funds are partly focused on environmental, social, or governance issues (ESG), while article 9 funds are fully aligned with sustainability objectives.

The report also found that most article 8 and 9 funds have no intent of achieving EU taxonomy in their reporting, due to “a shortfall in disclosures by underlying companies”.

MSCI instead looked at estimated EU taxonomy-aligned revenue to evaluate how many funds were aligned. It found that only 2% of funds have at least 20% of aligned revenue, while 63% have very little exposure.

In equity and fixed-income funds, only 12 had an estimated aligned revenue over 60%, with 10 of those focused on clean technologies and renewable energy. This indicates there could be a lack of diversification in some green funds, the report found.

“How can funds accurately convey their sustainable nature leveraging the EU taxonomy without the necessary bedrock of company disclosures? The short answer is that, right now, they cannot,” the report stated.

This page was last updated July 24, 2023

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