Professional investors think the asset managers looking after their ESG allocations need more regulations to rein them in.
A recent
The issue of how to treat ESG fund labels is growing increasingly thorny. In the US, the Securities and Exchange Commission has proposed rules that would require firms to provide more data to justify the environmental, social and governance labels they use. In the European Union, asset managers are struggling to keep up with regulations that are based on an unclear definition of "sustainable investment," and have already reclassified hundreds of funds amid widespread confusion.
Meanwhile, fund managers are trying to keep up with demand for sustainable investment products by reclassifying thousands of old products to fit with the EU's Sustainable Finance Disclosure Regulation. An analysis by PwC shows that of 8,017 so-called Article 8 funds — an EU designation that requires a product to "promote" sustainability — only 989 were new at the end of the second quarter. The rest were reclassified. A similar analysis of 1,061 Article 9 funds — whereby a product needs to have sustainability as its "objective" — showed that only 286 were new.
As lawyers warn of the potential legal risks attached to reclassifying, renaming or mislabeling an ESG fund, clients are trying to make sense of the ESG claims made by their portfolio managers.
Yet there's also a risk that extra regulations are drawing fund managers' "resources away from much-needed strategic planning and product development," PwC said.
"Our survey finds that regulatory and compliance costs have increased by more than 10%," the firm said. "This development favors large asset managers with the scale and resources to absorb these extra demands and spread the costs. For others, it creates a barrier to entry or puts further pressure on an already squeezed middle."
