The nub of the issue is the way in which regulators around the world are trying to figure out how to stop "greenwashing" and introduce consistent rules for measuring sustainable investing accurately.

A specialist firm in the sustainable finance space has criticised European Union regulators’ proposed changes to the way in which investment and other products are graded, saying this will cause confusion.

European Supervisory Authorities, which want to change the way sustainable finance disclosures are regulated, recommend that the European Commission considers bringing in a “sustainability indicator” to grade products such as investment funds, life insurance and pensions.

Regulators are trying to stamp out “greenwashing” – making investments appear “greener” than they really are – by tying together rules to give customers clear, comparable information. Without agreed standards, funds being touted as “sustainable” suffer a credibility problem. Policymakers are trying to counter investor cynicism about sustainable finance and ESG investing after recent years of mixed performance. However,  the issue is fraught with political, economic and scientific debates. For example, the European Commission has changed its taxonomy of what counts as "green" to include natural gas and nuclear power.

“The introduction of categories and/or with an indicator is a very different approach from the Article 6, 8 or 9 system we currently use in Europe,”  Bhavik Parekh, CFA, research associate at MainStreet Partners, said in a recent note. “The simple categorisation method is considered clearer to investors and could potentially increase interoperability with other regulations such as the UK’s SDR.”

Under the current regime of sustainable finance disclosure rules, a fund will either be classified as an article 6, 8 or 9 fund – depending on its  characteristics and level of sustainability. A new system, as proposed by the ESAs, will be more confusing, Parekh said.

“As acknowledged by the ESAs, the definition of a `sustainable investment’ is not easily compared between asset managers and likewise, we believe the same problem would be present with indicators, hence our preference for the category option,” he said. 

"A notable issue here is that this would represent a significant upheaval in regulation that was perhaps beginning to settle,” Parekh continued. “This would keep the regulatory burden high in the short term and risks putting off financial market participants entirely. The caveat to this is that some change is needed so, when it does come, it should be more robust/longer lasting and regulators should allow plenty of time to allow transition to the new system.”

In May, MainStreet Partners and Allfunds launched the Sustainability Navigator, a tool designed to streamline the construction of sustainable investment portfolios and deliver data insights for asset managers and wealth managers, in line with the the EU’s Sustainable Finance Disclosure Regulation (SFDR) regulation. Here is another article about the firm's reporting on sustainable finance.

ESG investment ideas are being increasingly embedded into the financial rules governing financial markets, even though ESG remains controversial in countries such as the US, heightened by the 2022 surge in energy prices, aggravated by the Russian invasion of Ukraine in February 2022, and other forces. (See an article here on views about ESG pushback.)