Clarity AI One of Five Article 9 Funds Underreport Their Exposure to Fossil Fuels

Clarity AI announced today the results of a follow-up analysis to its November 2022 analysis on Article 9 funds that are investing in companies with undeniable evidence of having violated the UNGC principles, as well as in companies deriving the majority of their revenues from fossil fuels. Today’s analysis endeavors to unpack why “green” funds would be investing in this way.

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“share of investments in companies that have been involved in violations of the UNGC principles of OECD Guidelines for Multinational Enterprises”

The European ESG Template (“EET”) is an industry tool developed to help financial market participants make disclosures in an easier way and it contains much of the same information as the SFDR Level 2 templates that have entered into force this month. It is and will remain voluntary for asset managers to decide to fill in. Despite this, many fund managers are already submitting EETs.

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Clarity AI’s follow-up analysis shed light on three distinct areas:

• The level of disclosure in the EETs is still very low: Out of a sample of 830 Article 9 funds, only 5% included a value for the data field “share of investments in companies that have been involved in violations of the UNGC principles of OECD Guidelines for Multinational Enterprises” and only 10% of funds disclosed the share of their investments that were exposed to fossil fuels
• There is a challenge with data comprehensiveness and completeness for UNGC and OECD guidelines-related violations: Only 43 Article 9 fund managers reported granular information in their EET that included fund exposure to companies with UNGC principles or OECD guidelines violations. Of them, 42 reported zero exposure; however, Clarity AI’s data suggests that close to 60% (25 funds) are investing in at least one company involved in such violations.
• One out of five Article 9 funds underreport their exposure to fossil fuels: When comparing Clarity AI’s data with the EETs from the 83 Article 9 funds that disclose this information, Clarity AI’s research team finds that 21% of these funds underreport their exposure to fossil fuels. On average their exposure is reported to be 4 percentage points (pp) lower than what Clarity AI data shows, but the difference can go up to 13pp.

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Patricia Pina, Clarity AI’s Head of Product Research & Innovation said, “Although the EET is still being rolled out, a great deal of information can be gained by analyzing existing submissions. It highlights the need for continuous clarity on the regulatory requirements of Article 9 funds while illustrating the need for a reliable data source to uncover violations and exposures. Clarity AI’s coverage is up to 13 times more than that of other providers and gives you access to the underlying elements of each fund.”

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[To share your insights with us, please write to sghosh@martechseries.com]