Last week, reports revealed Morningstar had removed over 1,200 funds totalling assets of $1.4trn from its European sustainable universe list, after a review of disclosures provided to investors in annual reports and prospectuses was carried out.
The data provider targeted funds with sustainability-linked fund names and those with objectives listed in Key Investor Information Documents (KIIDs) relating to ESG.
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It follows a report published in November by Morningstar after the EU's rules on sustainable disclosure were enforced in March 2021, revealing that the European sustainable fund universe had grown 65% between June and September.
However, according to Morningstar data provided to the Financial Times, assets under management of funds Morningstar considered to be genuinely sustainable at the end of September, dropped from $3.4trn to $2.03trn, following the review.
But Andy Harris, commercial director at The Sustainable Pension Company (SPC), said Morningstar's report highlights the subjective nature of fund ratings.
"In spite of the review, this appears to rely on the fund manager and investment house reporting the correct and relevant objectives; one can only hope there is no manipulation," he said.
"This reinforces my view that using agencies such as Morningstar to rate funds on their ESG credentials is far from perfect and often completely subjective. One may rate a fund highly where another does not."
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According to the SPC, greenwashing has made it increasingly challenging to distinguish between funds that genuinely have sustainable objectives, from those that do not.
But according to Harris, an "active screening" approach often serves investors better than methods carried out by ratings agencies.
Active investment via discretionary fund managers who know their investment houses and carry out research and due diligence before funds are considered in portfolios is a better approach, he said.
