A well-designed EU Ecolabel has the potential to provide clear guidance on the financial products retail investors can invest in, if they wish to support environmentally sustainable projects and activities in line with the EU taxonomy regulation. The European Commission wants to create a trusted and verified label for retail investors.
Fund managers and investment advisers face difficulties due to the proliferation of national labels throughout Europe, and significant differences in their specifications. An EU label dedicated to green financial products would address this and encourage the cross-border distribution of such products.
Regulators face the important challenge of striking the right balance between the strictness of the criteria – giving the label its credibility – and the availability of a sufficiently large pool of eligible investment opportunities, allowing for appropriate portfolio diversification to protect end-investors’ savings.
According to recent testing of the draft EU Ecolabel criteria, less than 3% of existing ‘green’ Ucits equity funds would qualify for the label under the current proposal. This would undermine the success of the EU Ecolabel, reducing its capacity to finance the transition, and increasing the risks for end-investors through a lack of sufficient diversification opportunities.
Market participants will also face obstacles in the screening of investment opportunities caused by the insufficient availability of reliable and comparable public ESG data. Other initiatives from the Commission aimed at narrowing this data gap are still under development, and will only become effective in a few years from now. This means that, at least in the short to medium term, there will be a scarcity of funds eligible for the EU Ecolabel.
One solution would be a progressive approach to setting thresholds. Realistic starting criteria would ensure that at least 10-20% of existing funds and other investments with sufficient alignment to the EU taxonomy would be eligible. After careful monitoring of market developments, the criteria could then potentially be revised and made more restrictive.
The criteria proposed will not only provide thresholds defining the minimum level of environmental sustainability against the EU taxonomy, but will also include environmental and social exclusions. Environmental exclusions should not rule out activities that contribute to a company’s transition. Analysis should be science-based and social exclusions should not go beyond the safeguards provided for in the EU taxonomy.
The current EU Ecolabel proposal may also unnecessarily restrict the large potential of stewardship. The proposed criteria on engagement risk shifting the resources of asset managers away from companies that need to be encouraged to transition, as they will now be required to focus on companies that already score highly in environmental benchmarks.
The engagement criteria should reflect the diversity of companies, as well as the diversity of engagement objectives. As engagement is resource-intensive, specific thresholds may shift attention to companies least in need, while diverting resources from those that show the highest potential for transition.
By taking these recommendations on board, the European Commission can achieve a smart EU Ecolabel for Retail Financial Products with a clear purpose, balanced criteria, while helping to ensure retail investor protection. This will potentially make it the next EU success story.
By Thierry Bogaty, EFAMA’s representative on the EU Ecolabelling Board
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