Nearly 20% of Article 9 sustainable funds are breaching ‘do no harm' standards, according to new research from Clarity AI.
This means they have more than 10% of their investments in companies that have violations of the UN Global Compact principles or the OECD Guidelines for multinational enterprises.
Violations include bribery and corruption convictions, anti-competitive practices, and environmental impacts such as a tourism-based company dumping fuel and food waste along with thousands of gallons of sewage into the ocean.
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Clarity AI reviewed 15,000 funds and their Sustainable Finance Disclosure Regulation (SFDR) classifications.
Among the 750 Article 9 funds within the universe that have sufficient information on at least 80% of their holdings, it found a fifth invest in 166 different companies that violate the UNGC or OECD principles. In addition, 40% have more than 5% exposure.
The SFDR lays down three main criteria to define a sustainable investment: It must contribute to an environmental or social objective, it must not significantly harm other environmental or social objectives (DNSH) and the investee company must follow good governance processes (GG).
To classify an organisation as a sustainable investment it must fulfil all three of the above criteria.
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Recent guidance on Article 9 funds suggests they should be comprised of nearly 100% sustainable investments. A small share of investments in companies that are not sustainable is expected.
Patricia Pina, head of product research and innovation at Clarity AI, said: "The classification of funds according to the SFDR guidelines is increasingly used in the markets as a shorthand for communicating that a product is sustainable.
"However, our analysis shows that some of the Article 9 funds currently in the market might be falling short of complying with the sustainability related criteria."
