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(Bloomberg) — Asset managers love them, while clients seem increasingly wary of them: Article 8 funds.
Asset managers love them, while clients seem increasingly wary of them: Article 8 funds.
(Bloomberg) — Asset managers love them, while clients seem increasingly wary of them: Article 8 funds.
It’s a category within Europe’s ESG investing rulebook that saw huge growth last quarter, as the asset-management industry slapped an Article 8 — also known as “light green” — tag on well over 600 funds that previously weren’t classified as sustainable, according to data provided by Morningstar Inc. At the same time, clients withdrew more than $30 billion from such products. A stricter environmental, social and governance classification — Article 9 — saw $6 billion of inflows.
When an asset manager sells a fund as Article 8, they’re promising clients that their money will go toward “promoting” sustainability. It’s a concept that was enshrined in the EU’s Sustainable Finance Disclosure Regulation, which started being enforced in March 2021 as the world’s boldest anti-greenwash rulebook to date. But 16 months on, there’s hardly any agreement within the fund industry as to what “promoting” sustainability means. What’s more, even regulators in the EU don’t really see eye to eye.
For investment clients trying to decide where to get the most bang for their ESG buck, it’s now “impossible” to do a meaningful comparison across products, according to Morningstar.
Meanwhile, there continue to be questions around the ESG-ness of Article 8. A Morningstar data analysis found that roughly two-thirds of Article 8 funds target between zero and 10% minimum exposure to sustainable investments.
A new regulatory framework is taking effect that will require financial advisers to make sure they’re taking ESG retail clients’ expectations into account, and explaining the characteristics of financial products in a way that doesn’t lead to misunderstandings. It’s an amendment to the revised Markets in Financial Instruments Directive that law firm Simmons & Simmons, which advises asset managers, has already suggested will add a new layer of risk to the asset-management industry.
“Because of patchy data and a lack of direct comparability between products, financial advisers will struggle to fulfill their new obligations,” according to Morningstar.
NEWS ROUNDUP
Social Taxonomy Shelved | The next milestone in Europe’s efforts to create a global benchmark for ESG investing has been shelved indefinitely as officials balk at devoting resources to a process that’s already marred by deep political division.
Meta Reacts to Data Pact | Meta Platforms Inc. reiterated its threat to pull its popular Facebook and Instagram services from the European Union if a new transatlantic data transfer pact doesn’t materialize. Its latest warning comes amid an imminent data flow ban it already faces from Ireland’s data-protection watchdog, which oversees the tech giants based in the country.
Fashion Probe | The UK’s competition watchdog started a probe into potentially misleading environmental claims made by fashion brands Asos Plc, Boohoo Group Plc and George at Asda, over greenwashing concerns.
ISSB Faces Criticism | The organization aiming to set worldwide climate reporting requirements for decades to come is under fire for putting corporate interests ahead of the planet’s.
Pimco Downgrades ESG Funds | Pacific Investment Management Co. and NN Investment Partners have cut the ESG status of a number of their funds after European authorities clarified rules guiding such classifications.
No Tax Break | In Luxembourg, the world’s biggest hub for ESG asset managers, firms have been unable to take advantage of a tax break intended to reward their efforts to do more sustainable investing.
Banks Fall Short | The world’s biggest banks are coming up short in their efforts to rein in global warming, according to an investor group representing more than $50 trillion of assets.
EU Climate Benchmarks | Investment funds tracking EU-regulated climate benchmarks jumped 25% last quarter, as asset managers look for ways to combat greenwashing.
EU Deal to Cut Gas Use | European Union countries reached a political agreement to cut their gas use by 15% through next winter as the prospect of a full cutoff from Russian supplies grows increasingly likely.
Gas and Nuclear | EU lawmakers voted to allow natural gas and nuclear energy to be labeled as green investments, removing the last major barrier to potentially billions of euros of funding from environmental investors.
US Climate Deal | In a breakthrough that surprised much of Washington, Senate Majority Leader Chuck Schumer and Senator Joe Manchin announced that they agreed on a plan that includes a record $370 billion in spending to fight climate change.
US States Target Banks | West Virginia will restrict BlackRock Inc., Goldman Sachs Group Inc., JPMorgan Chase & Co., Morgan Stanley and Wells Fargo & Co. from state banking contracts after the Republican state treasurer found that the companies engage in a so-called boycott of the fossil-fuels industry.
FSB Warns Banks | Financial institutions should brace for greater scrutiny as the world moves toward a low-carbon economy, the Financial Stability Board said in a report.
EU Targets Insurers | The EU’s top insurance regulator wants national authorities to tighten supervision amid evidence companies are using artificial intelligence to drive up prices unrelated to the risk or cost of service.
BLOOMBERG RESEARCH
Guarding Against Greenwashing | As ESG has increasingly affected investment decisions in Europe, the need for transparent and comparable data has become pivotal. Public-company disclosures can differ drastically, as reporting standards are new and often changing. Bloomberg and MSCI were the most frequently named as the No. 1 or No. 2 source of ESG data among European funds that were surveyed.
Most traders named multiple providers, suggesting they value various data inputs, and there’s room for competition. Almost a quarter of traders surveyed believe greenwashing accounts for more than 50% of ESG. Small funds were surprisingly more pessimistic, as they showed more support for ESG throughout the study.
What percentage of ESG is greenwashing?
US Climate Bill’s Impact | Vestas Wind Systems AS, First Solar Inc., SolarEdge Technologies Inc. and other clean-energy equipment suppliers may see elevated US demand for wind and solar energy in 2023-2025 — with potential upgrades to consensus sales expectations — if the Inflation Reduction Act becomes law.
Carbon Border Tax | This will be a “make or break” year for launching a carbon tariff on imported goods, according to BloombergNEF. The European Commission has proposed levying a tariff on iron and steel, aluminum, fertilizers and cement. In addition, the European Parliament wants to include organic basic chemicals, plastics and hydrogen. With introduction planned for next year, “consensus on devilish questions around coverage, timeline and exports is lacking,” analyst Antoine Vagneur-Jones wrote in a July 27 report.
OFF THE SHELF
ESG Meets Real World | ESG has become a punching bag for the far right, disgruntled corporate executives and even industry insiders.
Taxonomies | Floods, droughts and food shortages are just some of the effects of climate change, while exploitation and corruption drive social injustice around the world. Governments tackling these issues are realizing that to solve them, they need first to define and measure them. Some are turning to so-called taxonomies that establish which economic practices and products are harmful to the planet and which aren’t. The idea is that the price of goods and services must reflect the human and environmental cost of both production and disposal, which in turn would spur much-needed change. But designing a code is fiendishly difficult.
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Like a bad houseguest, hotter-than-expected inflation continues to linger in the US.
Traders had hoped by now the Federal Reserve would be free to start cutting interest rates — boosting rate-sensitive stocks and unlocking a largely frozen real estate market. Instead, stubborn price growth has some on Wall Street rethinking whether the central bank will lower rates at all this year.
You don’t have to be a stock market genius to outperform most pros.
You might not think it’s possible to outperform the average Wall Street professional with just a single investment. Fund managers are highly educated and steeped in market data. They get paid a lot of money to make smart investments.
But the truth is, most of them may not be worth the money. With the right steps, individual investors can outperform the majority of active large-cap mutual fund managers over the long run. You don’t need a doctorate or MBA, and you certainly don’t need to follow the everyday goings-on in the stock market. You just need to buy a single investment and hold it forever.
That’s because 88% of active large-cap fund managers have underperformed the S&P 500 index over the last 15 years thru Dec. 31, 2023, according to S&P Global’s most recent SPIVA (S&P Indices Versus Active) scorecard. So if you buy a simple S&P 500 index fund like the Vanguard S&P 500 ETF (VOO -0.23%), chances are that your investment will outperform the average active mutual fund in the long run.
It’s a good bet that the average fund manager is hardworking and well-trained. But there are at least two big factors working against active fund managers.
The first is that institutional investors make up roughly 80% of all trading in the U.S. stock market — far higher than it was years ago when retail investors dominated the market. That means a professional investor is mostly trading shares with another manager who is also very knowledgeable, making it much harder to gain an edge and outperform the benchmark index.
The more basic problem, though, is that fund managers don’t just need to outperform their benchmark index. They need to beat the index by a wide enough margin to justify the fees they charge. And that reduces the odds that any given large-cap fund manager will be able to outperform an S&P 500 index fund by a significant amount.
The SPIVA scorecard found that just 40% of large-cap fund managers outperformed the S&P 500 in 2023 once you factor in fees. So if the odds of outperforming fall to 40-60 for a single year, you can see how the odds of beating the index consistently over the long run could go way down.
Warren Buffett is one of the smartest investors around, and he can’t think of a single better investment than an S&P 500 index fund. He recommends it even above his own company, Berkshire Hathaway.
In his 2016 letter to shareholders, Buffett shared a rough calculation that the search for superior investment advice had cost investors, in aggregate, $100 billion over the previous decade relative to investing in a simple index fund.
Even Berkshire Hathaway holds two small positions in S&P 500 index funds. You’ll find shares of the Vanguard S&P 500 ETF and the SPDR S&P 500 ETF Trust (NYSEMKT: SPY) in Berkshire’s quarterly disclosures. Both are great options for index investors, offering low expense ratios and low tracking errors (a measure of how closely an ETF price follows the underlying index). There are plenty of other solid index funds you could buy, but either of the above is an excellent option as a starting point.
Adam Levy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
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