Stakeholder group flags issues with EU Taxonomy

January 27, 2023

The European Securities and Markets Authority (ESMA) has been urged to clarify the label and scope of Article 8 and Article 9 products.

In a letter, the Securities and Markets Stakeholder Group (SMSG) has advocated for a clearer definition of Article 8 and Article 9 funds amid claims there is currently too much of an overlap.

As a result, the SMSG claims many asset managers incorrectly use Article 8 and Article 9 labels for sustainable strategies.

According to the SMSG, the vague definition of what constitutes an Article 8 or Article 9 fund is increasing the risk of greenwashing and creating a potential mismatch of investors’ expectations.

Currently, the Sustainable Finance Disclosure Regulation (SFDR) classifies an Article 8 fund as a strategy that promotes ESG characteristics.

Therefore a fund can be categorised as Article 8 if it “complies with certain environmental, social or sustainability requirements or restrictions laid down by law.”

However, the SMSG has argued the minimal ESG requirements are unclear, and classifications are too broad.

This has led to a large difference in the type of funds labelled Article 8 and could create potential mismatches between investors and products.

The SMSG stated: “In regard of the “art 8” classification, the notion of ‘environmental and social characteristics’ is so broad that with some degree of measurability, virtually anything can fit into it.”

The SMSG has recommended that Article 9 funds should be the “sole carriers” of a green classification, similar to strategies with climate transition benchmarks.

It has also been argued the Article 9 classification should also extend to social and ethical funds as well as other ESG-intensive funds.

As a result, retail non-professional investors would be better protected against greenwashing.

The SMSG added it is “is of the opinion that art. 9 funds should focus on thematic funds, green or project bond funds, engagement funds and impact investing, while these terms should be clearly defined.”

There is currently no agreed-upon definition of these terms, such as ‘engagement fund’, available on ESMA’s website.

Read Minerva's previous coverage of EU Taxonomy criticisms.

https://www.old.manifest.co.uk/expert-group-proposes-revamp-of-eu-taxonomy/