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MainStreet Partners: Report on status of ESG integration in the European funds market

MainStreet Partners, the London-based independent ESG Advisory and Portfolio Analytics firm, has today launched its 2023 ESG Barometer report.

The 2023 ESG Barometer provides a clear picture of the analytics of ESG research across a large universe of
funds and looks at the SFDR classification and recent European ESG Template (EET) data points. It also explores ESG and sustainable strategies by asset class, sub-asset class, and by size of asset managers.

This comprehensive annual report is the result of analysis conducted by MainStreet Partners’ Fund Research
Team, drawing on its proprietary ESG database of more than 5,700 funds/ETFs and over 64,000 individual
ISINs, covering more than 300 Asset Managers with AUM totalling €4.4 trillion (£3.8 trillion).

Key findings:

I. Many funds with Article 9 status under the EU SFDR are not currently meeting the highest focus on
sustainability that would be expected.

  • Analysing the EET data*, we found that over 90% did not have or did not disclose environmental
    targets.
  • Around one-third of Article 9 funds stated a minimum sustainable investment of 30% or less.
  • This analysis demonstrates that EET data is still unreliable and we expect a significant
    improvement in quantity and quality of EET data in the coming months.

[*The European ESG Template, EET, is the standardised way to exchange ESG data.]

II. There has been a clear shift in funds moving from Article 6 to Article 8 status, as a result of asset
managers changing their ESG approach to process, disclosure and regulatory classification.

  • Overall, the number and percentage of Article 9 funds in MainStreet Partners’ universe have
    remained steady, whereas there has been a clear shift from Article 6 to Article 8 (Article 6: 75% in
    2021 vs 50% in 2022).

III. Medium-to-Large Asset Managers continue to score slightly higher in ESG Ratings (on average) than
Smaller/Boutique Asset Managers.

  • Within our framework of analysis, Asset Managers facing issues around greenwashing
    accusations, and risk management and compliance issues were penalised in their ESG Rating. The
    sub-pillars “Institutional Credibility” and “Reputation” were the weakest points of these Asset
    Managers. Within our framework of analysis, Asset Managers facing issues around greenwashing
    accusations. This could be due to the pressure on resources needed to keep up with changes in
    regulation, compliance requirements and sheer quantity of data which is suggested by the fact
    that risk management and compliance issues were the items penalised in their ESG Rating. The
    sub-pillars “Institutional Credibility” and “Reputation” were the weakest points of these Asset
    Managers.
  • Notably, though, the difference between Larger and Smaller Asset Managers has narrowed in the
    past year.

IV. Emerging markets funds are at a disadvantage compared with their developed market peers and
consistently scored lower in ESG Ratings (~10% lower for Article 8 & 9 funds).

  • This is partly due to investee companies receiving lower ESG Ratings
  • However, the lack of data and disclosure from emerging market regions makes ESG analysis generally more difficult. If the increasing requirements by regulators for data and disclosure outpaces improvements made by companies that operate in these regions, we may see this trend persist or even worsen.

Simone Gallo, Managing Director at MainStreet Partners, said:

“The new European regulation on sustainable investments has created a revolution in the Wealth and Asset Management industry and ESG conversations are now on the top of the agenda across Boards and Executive Committees.

“But there is also significant confusion in the market about what constitutes a sustainable fund as well as how to avoid the risk of ‘greenwashing’ across a huge offering of new products marketed as ESG, Impact or Sustainable.

“For these reasons we continue to see an increasing number of investors across Europe and Asia that either require, or desire, easy-to-understand and consistent ESG ratings that go beyond the simple bottom-up aggregation of ESG ratings of holdings to provide an independent holistic ESG due diligence.”

View Rating Methodology: ESG Everything – The ESG platform by MainStreet Partners.

 

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