Most issuers of funds labeled as sustainable would have to reboot if they want to meet regulatory demands in the U.S., U.K. and European Union, according to an analysis released Monday by Clarity AI, a sustainability technology platform.
Clarity AI analyzed the three regulatory regimes for naming investment funds, with a focus on changes proposed by European regulators. It found that only 4% of funds labeled as sustainable would be able to comply with all three regimes, while most funds would have to be renamed or reworked.
That underscores how different regulators "are interpreting the meaning of core concepts like ESG and sustainability." said Patricia Pina, head of product research and innovation at Clarity AI, in a news release on the findings.
The analysis cites regulations proposed in November by the European Securities and Markets Authority that would set minimum thresholds for Article 8 funds, also known as light green, with certain environmental, social and governance or sustainability-related terms in their names. Those funds would have to invest 80% of their assets in alignment with the fund name, 50% in sustainable investments defined by the Sustainable Finance Disclosure Regulation, and all assets according to criteria outlined in a benchmark regulation aligned to the Paris Agreement, among other proposed standards.
Examining 18,000 funds across Europe to test the ESMA proposals, Clarity AI found that only 20% of current Article 8 funds termed sustainable plan to meet the 50% SFDR threshold, while 20% plan to make less than 10% sustainable investments.
"Furthermore, the proposal from ESMA does not appear to align particularly closely with either of the proposals from the U.K. or the U.S.," the analysis said.
