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Aug 13, 2019

What makes an ESG investment is becoming unclear, warns Morningstar

Difference between traditional and sustainable funds is becoming blurred

As sustainable investment across Europe continues to grow, investors face a major problem in the form of unclear information about just how investments are adopting ESG metrics, according to a new report published by data and research group Morningstar.

In its report: ‘European Sustainable Funds Landscape,’ it identified 2,232 sustainable funds in Europe that state they use ESG criteria or pursue a sustainability-related theme alongside financial return.

One major trend it notes is that the difference between traditional and sustainable funds is becoming blurred, with more asset managers integrating ESG into their standard investment processes, screening out the most controversial companies from traditional investments.

This is having an impact on the way that investors can understand information around sustainable funds. The report asserts: ‘The information provided in legal and marketing documents about how funds – both sustainable and traditional – use ESG is often incomplete and unclear. This, coupled with a lack of standardized language, makes it difficult to understand the extent to which funds adopt ESG. It also makes categorizing and comparing strategies challenging.’

The report outlines that some 168 new funds were launched in Europe as sustainable funds meeting the definition in the first half of the year, compared to 305 for all of 2018. Assets of the funds identified reached €595 bn ($666 bn), with inflows through the first six months of the year hitting €36.9 bn, which is not far off the total for 2018 of €38 bn.

Within this, passive funds have accounted for a quarter of new inflows, with such funds now constituting 17.7 percent of the universe, up from 10 percent five years ago.

Hortense Bioy, director of passive strategies and sustainability research for Morningstar in Europe, says in a statement: ‘This report underscores the challenge of identifying and categorizing sustainable funds. There is a distinct lack of information in prospectuses, factsheets, and key information documents. The language used in these documents is often unclear and lacks standardization.

‘Fund names cannot be relied upon in determining whether the underlying strategies incorporate ESG criteria and, if they do, to what extent. Some funds with key terms like ESG or sustainable in their names don’t seem so different from the growing cohort of traditional funds that are now formally considering sustainability issues as part of their investment process, engaging with companies, and screening out the least ESG-compliant companies. Thus, the line between traditional and sustainable investments is becoming blurrier by the day.’