The classification of sustainable investment funds or ESG (acronym for environmental, social and governance criteria) must be more rigorous. At least that is the opinion of experts from the CFA Institute, the global association of investment professionals (the acronym CFA stands for Chartered Financial Analyst, or Certified Financial Analyst). Visit the specialized portal elEconomista ESG.
A report prepared by the CFA Institute’s Research and Policy Center analyzes the classifications of these funds in the United States, the EU, and the United Kingdom. The bottom line is that all of these frameworks have implementation problems, due to “their lack of attention to observable characteristics, imprecise definitions, or an incomplete logical structure for allocating funds to mutually exclusive groups.”
This CFA study is being made public at a time when sustainable investment funds are in the spotlight.. In the EU, the massive wave of new regulations for these investment products in recent years has generated a certain rejection, even weariness, among asset managers with regard to sustainability. The European Commission is currently working on revising its classification of sustainable funds, its Disclosure Regulation and Sustainable Finance Disclosure Regulation (SFDR), which has sparked controversy in the industry; it criticises its complexity and lack of precision on certain aspects. This regulation, which was not created with the aim of generating labels for funds (but rather to establish what information managers must disclose), has done so in practice: it has established the difference between funds Article 8 (also known as light green) And Article 9 (dark green(more demanding in terms of sustainability). When things go wrong, these denominations have served as labels.
In the United States, the situation is more radical: a real movement has awakened there anti-ESGwhich even pushes managers to prefer to keep quiet about their sustainable initiatives.
The CFA Institute document, titled How to Create a Better ESG Rating System), defines three observable characteristics that would allow the funds to be classified into 3 different blocks:
- The existence of one or more processes that take into account ESG information with the aim of improving risk-adjusted returns;
- The existence of one or more policies controlling the exposure of the fund’s investors and their contribution to specific systemic ESG issues;
- The existence of an explicit statement of intent, accompanied by an action plan, to contribute to a desired future state of environmental or social conditions, and a process for measuring progress.
“The report will be particularly useful to regulators who are establishing and adapting regulations for ESG funds, as well as industry participants seeking to both market and select funds,” the CFA Institute said in a statement.
In the words of Jose Luis de Mora, President of the CFA Society SpainTHE leg of this association, “the SFDR has shown that conditional information – for example, information that is only made when a fund has sustainable investment as its objective – gives rise to a classification system de facto in the market. This is not ideal, as classification systems must be intentionally designed to meet a defined set of needs. For funds without a sustainability or transition label, the market still needs a reliable way to distinguish between funds that use ESG information to make risk-return decisions and funds that take a political stance on specific ESG issues.
For his part, Chris Fidler, Head of Global Industry Standards at CFA Institutenoted that when ambiguous terms are used in regulation to create special rules for certain types of funds, it “can create significant uncertainty in the marketplace. Our report shows how to develop robust definitions for fund categories, and we hope it will lead to clearer definitions in regulation, which would benefit both investors and fund managers. The true test of a rating system is that different raters rate the same set of funds in the same way; if they do so consistently, there is a good system. If the same fund is assigned to different groups, revisions are needed,” Fidler added.
