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Morningstar ESG Update

A recent Morningstar, Inc. analysis in 4Q2021 resulted in the ESG (Environmental, Social and Governance) label being removed from more than 1,200 funds, equating to approximately 20% of the ESG universe of funds. Total assets impacted are estimated at $1.2 trillion. Recently, concerns have mounted that asset managers may be making misleading claims regarding the extent to which their allocations are consistent with ESG and SRI (Socially Responsible Investing) goals.


The ESG label was removed from funds that claim to consider ESG factors in their investment process, but do not integrate them significantly into their investment selection.


The change is designed to address a phenomenon known as “greenwashing” in which fund managers attempt to take advantage of the increased investor interest in ESG strategies.


In 2021, Europe introduced the Sustainable Finance Disclosure Regulation (SFDR) in a move to identify true ESG managers. As a result, the ESG label was removed from $2 trillion worth of funds, according to the Global Sustainable Investment Alliance (GSIA).


SFDR was designed to identify asset managers with overstated ESG claims. The new regulation requires firms to disclose and classify their investment products under one of three categories:


  • Article 6, which highlights ESG risks

  • Article 8, which promotes sustainable and ESG characteristics

  • Article 9, which establishes measurable ESG objectives that must be met.


The majority of the funds and investment strategies that were removed from the ESG designation were under the Article 8 classification.


Morningstar estimates that there are currently almost $4 trillion in assets being classified by the industry as Article 8 or Article 9 funds.


European authorities acknowledged the need to revise some of the definitions that are currently guiding SFDR allocations. In an effort to further mitigate greenwashing, the European Commission stated that it will introduce minimum standards for Article 8 funds.


Analysts expect that more strategies will lose their ESG label status as additional detailed evaluations continue throughout 2022. While the ESG universe may be contracting, the ESG quality of identified strategies will increase, making it easier for investors to support these types of initiatives.


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