Avoid greenwashing over time

In February, Morningstar withdrew 1,200 funds – for €1,300 billion – from its European Sustainable Investments List. Interview with Laurent Auchlin from Anglo-Swiss Advisors.

According to countless management companies, there are no longer any non-ESG funds. Rare, even notorious, ESG products now make up the bulk of the investment offering in Europe. Since the finalization of the SFDR technical framework last year, the majority of European products claim to be covered by one or the other of the new provisions (Articles 8 or 9). At the end of 2021, Morningstar valued Article 8 and 9 funds at €3,320 billion, representing 37% of fund assets distributed in Europe, and forecast that the same funds would account for 50% of assets by mid-2022. And yet, in February of this year, the same Morningstar withdrew 1,200 funds from its European Sustainable Investments List – for €1,300 billion, or a third of the assets declared sustainable in September. The “green washing”* at DWS in the last few days seems to confirm the problem. A few questions for Laurent Auchlin from Anglo-Swiss Advisors, co-responsible for the methodology of the Swiss Sustainable Funds Awards.

Are there still non-ESG funds?

ESG funds have gone from rarity to banality in a very short time. Also, the European regulation on sustainability reporting in the financial services sector (SFDR) seems to have changed the game in collecting management companies. But beware, there is a significant gap between the announcement effects and reality. In evidence, in February 1,200 funds – reclassified from Article 8 to Article 6 – were removed from Morningstar’s European Sustainable Investing List. Remember that membership in any of the SFDR articles is by self-declaration. The European Union intends to introduce controls, but this is not yet effective.

What are the implications of these changes for the universe of the Swiss Sustainable Funds Awards?

A major impact because we now know that we no longer have to rely on statements that are sometimes misleading even at first approximation. In order to further narrow our selection in the first phase, we have increased the weighting of the development of each fund’s sustainability aspect over several years. In other words, we ask ourselves questions like “Was this fund sustainable two or three years ago” only to find that it wasn’t always the case because some companies have been greenwashing over time.

“Greenwashing over time”?

Yes. In this way we put into perspective the practice of presenting funds that are now sustainable but whose past performance was due to investments that had nothing to do with responsibility, for example investments in fossil fuels, discreetly resold there for a few months to “clean up” the deposit. For each new fund, we therefore check the sustainability of its underlying assets over several years and the consistency of the portfolio management method over time. It’s real work for the databases upstream of selection. And let’s avoid those who have done well on oil and recently washed their wallets.

What about US managers who started ESG much later than their European counterparts?

Based on our approach, no US manager has historically believed in ESG, even if some had clean portfolios. Only a few have integrated ESG into their processes and are therefore eligible for the Swiss Sustainable Funds Awards. That means the market is moving fast. According to Morningstar, more than 60% of inflows will quickly flow into Article 8 and Article 9 funds…which raises the right questions for unconvinced managers.

What about passive ESG management?

ESG management based on indices is controversial and discussed. Among other things, because it is based on notations whose framework is poorly defined. It’s an ESG label at a lower cost.

The European taxonomy has now included nuclear energy as acceptable.

European legislation has effectively turned nuclear power into a green industry, but only French executives have joined it. But even if there will never be a uniform definition of ESG, asset managers can no longer do without convictions in this regard.

What future for the Swiss Sustainable Funds Awards?

They will continue to shine a light on this universe as it is one of the few awards not based on registration or any form of funding, but solely on merit. Over the next two years, the universe of eligible funds will change significantly due to the scrutiny that will be applied to true ESG funds. It remains to be seen whether enough private customers will ask. Will the expected generational change really take place? Doesn’t the customer primarily expect performance? The example of some large houses that have made a whole range of ESG strategies available without success is questionable. And ESG hasn’t performed for 6 months…

Swiss Sustainable Funds Awards

Organized by Voxia for the fourth consecutive year, the Swiss Sustainable Funds Awards (SSFA) are presented by the most important umbrella organizations such as the Swiss Financial Analysts Association (SFAA), the Swiss Training Center for Investment Professionals (AZEK), the Swiss Association of Pension Funds (ASIP) , the Asset Management Association Switzerland (AMA) and the Swiss Sustainable Finance (SSF).
This year, the prizes will be awarded to the winners of eight investment categories and two special categories by a jury whose deliberations are based in particular on the in-house ESG analysis by Conser – an independent auditor and selector of sustainable funds – who evaluated the underlying values of all eligible funds as well as the analysis of quantitative performance and risk data by the consulting firm Anglo-Swiss Advisors.
The jury, chaired by René Sieber, specialist in asset management and professor at the Geneva Finance Research Institute (GFRI) of the University of Geneva, consists of Suzanna Gobet (Bedrock Group), Jörg Grossmann (Allfunds), Frank Juliano (Compenswiss ), Stéphanie de Mestral (De Pury Pictet Turrettini & Cie), Stefano Battiston (University of Zurich) and Beatrix Wullschleger (Pension Fund Basel-Stadt).

* According to the expression used by Les Echos in an article dated June 1st

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