All but very few European exchange-traded funds (ETFs) with top ratings for environmental, social and governance (ESG) face having the removed from April, as benchmark provider MSCI looks to tighten its criteria amid wider financial industry concerns about greenwashing.
The number of European ETFs with an 'A' rating for ESG will reduce from 1,120 to just 54, according to an update from iShares, the passive funds arm of US fund giant BlackRock Inc (NYSE:BLK).
This will cause reverberations around the ETF market, as ESG funds accounted for 65% of European inflows last year, as per Morningstar data.
Following the change in criteria, almost 1,500 funds are set to receive a lower rating, with 78 getting and ESG rating update and 905 left unchanged.
There will also be 462 ETFs with no ESG rating, up from 24 currently.
Concern about greenwashing from regulators has led to increased pressure being placed on benchmark providers to tighten the criteria used to rate funds, including MSCI, where US$13.5trn-worth of assets are benchmarked against its indices.
MSCI's rejig follows a consultation that has not yet been published, with the iShares update giving an early indication of the effect of MSCI’s wider plans.
No synthetic swap-based ETFs, which track other assets but do not buy the underlying assets, will keep their ESG ratings after the changes, representing most of the funds set to lose sustainable labels.
With ESG-focussed funds set to hit a combined value of US$50trn by 2025, equalling roughly one third of traded assets, regulators have moved to watch markets more closely in recent months.
The UK’s Financial Conduct Authority warned earlier this week it would fine benchmark providers if they failed to improve rating methods, suggesting vague details in current processes could be prompting greenwashing.
It followed a similar move by the US Securities and Exchange Commission which said in February it would scrutinise ESG rate-setters more heavily this year, given the firms, including Bloomberg, S&P Global and Moody's, do not use standardised scoring methods.
MSCI, meanwhile, said its changes “will lead to fewer funds being rated as triple or double-A and will reduce the volatility in ESG fund ratings,” though it is yet to confirm the scale of downgrades itself.