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Almost 20% of Article 9 sustainable funds are breaching ‘do no harm’ standards, according to new research from Clarity AI. That means they have more than 10% of their investments in companies that have violations of the UN Global Compact principles or the OECD Guidelines for multinational enterprises. 

Those violations included bribery and corruption convictions, anti-competitive practices, and environmental impacts, for example: a tourism-based company dumping fuel and food waste along with thousands of gallons of sewage into the ocean.

Clarity AI reviewed 15,000 funds and their Sustainable Finance Disclosure Regulation (SFDR) classifications. Among 750 Article 9 funds with sufficient information on at least 80% of their holdings, Clarity AI found that 20% had invested in one or more of the166 companies believed to have violated UNGC or OECD principles. A further 40% had more than a 5% exposure.

The SFDR lays down three main criteria for defining a sustainable investment. These are that it must not contribute to an environmental or social objective, that it must not significantly harm other environmental or social objectives (DNSH), and that the companies invested in must follow good governance (GG) processes. 

For an organisation to be classified as a sustainable investment, it must fulfil all three of these criteria. Recent guidance on Article 9 funds suggests they should be comprised of close to 100% sustainable investments, although a small share of investments in companies that are not sustainable is anticipated. 

Clarity AI head of product research and innovation Patricia Pina said ‘The classification of funds according to the SFDR guidelines is increasingly used in the markets as shorthand for saying that a product is sustainable. But our analysis shows some Article 9 funds currently in the market might be falling short on compliance with sustainability related criteria.’

Link: https://www.investmentweek.co.uk/news/4059538/sustainable-funds-fall-short-sfdr-standards