The reclassification of one of Aegon’s bond funds under Article 8 of the EU Sustainable Finance Disclosure Regulation (SFDR) may attract scrutiny from regulators and raise investor concerns over greenwashing. A low threshold of disclosure required of Article 8 funds to justify their sustainability and ESG claims adds to this risk.
Aegon (NMS:AGN) will add a climate transition focus to its Short Dated Investment Grade fund, with €567m in AUM, to enable it to be classified as an Article 8 fund.
Reasons for the move include planned changes in investment strategy towards responsible investing, and leveraging Aegon’s proprietary climate transition framework.
Scrutiny by regulators over mislabelling of funds will likely increase as deadlines to comply with EU SFDR reporting standards approach.
Investor demand has been driving fund managers to provide more investment options in the form of funds that qualify under the SFDR’s ESG and sustainability classifications.
One approach has been to classify funds under Article 8 (promoting environmental or social characteristics, or ‘light green’), or Article 9 (sustainability as their core investment objective, or ‘dark green’).
Morningstar estimates that 192 new funds were initiated in the EU during the first half of 2022, 183 were classified as Article 8. Further, an estimated 700 funds changed SFDR status in the second quarter, with a majority coming from upgrades to Article 8 funds from Article 6 (require disclosure of sustainability).
Wide interpretation of Article 8 criteria feeds greenwashing concerns
A wide interpretation of the criteria required to be classified under Article 8 is responsible for a lot of investor concern and regulatory scrutiny over greenwashing. By definition, these products must invest in assets with positive environmental or social characteristics, and have good governance principles.
Funds could use a screening strategy, factor in ESG ratings, and if measuring performance against a benchmark, must measure their sustainability or ESG scores against those of the benchmark as well.
One way in which a fund can be seen to promote environmental and social characteristics under the Article 8 designation is to adopt the mandatory Principal Adverse Impact indicators in their disclosure.
A report by the European Supervisory Authorities (ESAs) had the following takeaways from a survey they conducted among the various National Competent Authorities (NCAs), or financial conduct authorities, in the EU.
Their observation that the survey provided “good examples of best practices, and less good examples of voluntary disclosures” was particularly revealing. The survey found:
- Compliance with voluntary disclosures varies significantly across respondents, but, overall, the first disclosures since the application of the SFDR are not very detailed. They (ESAs) expect this to change when the SFDR Delegated Regulation applies starting in January 2023, for the disclosures made for the 2022 reporting period.
- Overall, they found a low level of disclosure on the degree of alignment with the objective of the Paris Agreement, which is also often vague when disclosure of alignment is made.
- The level of compliance with the required details explaining why financial market participants do not consider the adverse impact of their investment decisions was also low.
To ensure appropriate supervision of investment firms by the NCAs, the report called for regular surveys in individual markets to gauge compliance with disclosure requirements.
Aegon’s sustainability framework criticised
In reclassifying its Short Dated Investment Grade bond fund under Article 8, Aegon points to its sustainability framework and in-house research team to select investments. Among its sustainability commitments, it has pledged to transition its €156 billion general account portfolio to net-zero greenhouse gas emissions by 2050.
Interim targets also include a 25% reduction in the weighted average carbon intensity of €55 billion of corporate fixed income and listed equity general account assets, “where it has control”. It plans to update this and set additional targets at five-year intervals until 2050.
Aegon also committed to a 50% carbon reduction in its standard fund for workplace pensions by 2030, going to net zero by 2050.
Yet, the financial services company was named among 29 major Dutch companies that were falling short of their climate plans by Milieudefensie, a climate change activist organisation.
A study commissioned by it with the NewClimate Institute scrutinised the climate commitments from financial institutions, including Aegon, found that the emissions associated with their investments was on average 700 times larger than that of their offices.
In the case of Aegon specifically, the study assigned low scores to the transparency and integrity of its 2050 net zero commitments.
The postponement of more stringent SFDR reporting standards by six months to January 2023 has also heightened concerns over greenwashing. In January of 2022, Morningstar stripped 1,200 funds, representing $1 trillion in assets, of their ESG label, most of which were classified under Article 8.