Asset managers have "growing concerns" over potential greenwashing allegations and regulatory scrutiny of their ESG fund classifications, according to an ESG survey from Barclays.
The survey also found investors placing more scrutiny on sovereign issuers and on the credibility of net-zero commitments.
The third annual ESG investor survey, conducted in June and July in the U.S., U.K. and Europe, polled over 230 investors in a mix of job functions, including portfolio managers, research analysts and ESG specialists. Fixed-income managers made up two-thirds of respondents, followed by equity and multiasset managers.
A "resounding theme" of this year's survey was greenwashing, including more scrutiny of how ESG funds are classified and the potential for more actions by regulators, the survey report said.
Survey respondents were asked about the sustainable investment components of funds classified as Article 8 or Article 9 under the European Commission's Sustainable Finance Disclosure Regulation. Article 8 funds comply with certain ESG requirements, while Article 9 funds must have specific sustainable goals.
Based on the survey responses, "concerns around fund classifications may be warranted," the survey said.
"We were surprised to see that a quarter of respondents had less than 50% of their Article 9 funds in sustainable investments," despite European Commission guidance, the survey report said.
As regulators increasingly scrutinize ESG funds, particularly the sustainability objectives of Article 9 funds, "we would expect investors to start looking more critically at these allocations going forward," the report said.
The survey also found a broad range of views on what percentage of Article 8 funds should be made up of sustainable investments. With 63% of respondents having allocations of 10% or more to sustainable investments within their Article 8 funds, it suggests "that some allocation to sustainable investments is becoming an important part of Article 8 strategies, despite there being no formal requirement to do so," said the report.
While further guidance from the European Commission on minimum criteria for Article 8 products is expected, the survey found that 30% of respondents with Article 8 funds allocate more than 50% of them to sustainable investments, and 14% of respondents have allocated more than 75%.
"This suggests to us that some fund managers are also being cautious about applying the Article 9 classification to funds, even when their portfolio could arguably be seen as having broad sustainability objectives," the survey report said.
Also, the survey fund that sovereign issuers "can no longer escape ESG scrutiny," driven by investor pressure as well as asset managers wanting to classify more funds as Article 8, including core fixed-income strategies. For the 50% of respondents now incorporating ESG into their sovereign analysis, most are doing it across the full universe of countries, and despite limited consensus over the best strategies and data for that analysis, the survey found.
When it comes to having issuers with high carbon emissions in their portfolios, more that 50% of respondents felt that end-investors were uncomfortable, while just 13% were comfortable.
Still, with transition strategies "a relatively hard sell" to investors compared to low-carbon funds, it is increasingly important for investors to do due diligence to understand the quality and credibility of companies' transition plans, according to the survey, which found that 85% of respondents have a methodology to assess the credibility of net-zero targets.
Asked about key performance indicators they use to demonstrate a fund's environmental and/or social characteristics in Article 8 funds, respondents cited greenhouse gas emissions as the most popular data point, followed by diversity indicators.
