A quarter of all Article 8 funds could be accused of greenwashing based on their sustainability framework and practices, according to MainStreet Partners 2024 ESG Barometer report.

The 24% of funds classified as a greenwashing risk marks a four percentage point increase from the 20% flagged at the end of 2022.

The research draws on a database of over 7,700 funds and ETFs, covering over 350 asset managers with approximately €10trn assets under management.

The amount of Article 8 funds overall increased by 20% year-on-year, while Article 6 funds reduced by 24%.

See also: – Jan Oliff Financial Planning Q&A: Regulation and the public encourage greenwashing

Under the new Sustainable Disclosure Requirements (SDR) regime, unveiled by the FCA in November 2023, funds with ‘sustainable’ in the name must meet the 70% threshold of assets aligned to the fund’s sustainability objective.

MainStreet found that the terms ‘Sustainable’ and ‘ESG’ were the most commonly used by asset managers when naming funds. The sustainable term was more likely to be found in active strategies, whereas ‘ESG’ was more commonly used in passive funds and ETFs.

Neill Blanks, managing director at MainStreet Partners, said: “2023 was a challenging year for asset managers on many fronts, including responding to regulatory changes in sustainable investing, such as the FCA’s SDR.”

He added: “In helping asset managers to anticipate the needs of investors, we urge them to look beyond company operational sustainability to understand how companies play into global ecosystems.

“This can provide clarity on supply chain resilience or exposure to ESG-related issues, as well as identify companies with business models that challenge the status quo. It is through actions like this that asset managers can meet their regulatory obligations, and – importantly – identify and avoid allegations of greenwashing.”

This article first appeared on ESG Clarity’s sister title Portfolio Adviser.