A warning shot
08 Jan 2025
As the world welcomes the new year, Clelia Frondaroli looks back on the work of regulators to tackle financial institutions’ alleged sustainability claims
Image: artinun/stock.adobe.com
Environmental, social, and governance (ESG) funds have experienced a year of highs and lows. Between the influx of anti-ESG legislation and accusations of greenwashing, it is safe to say that both financial institutions and investments centred around ESG have not come out unscathed.
One such institution that has prided itself on its sustainable commitments, Aviva Investors, has appeared to have fallen under the scrutiny of Luxembourg’s financial regulator.
Yet, as news surrounding Aviva’s sanction from the Commission de Surveillance du Secteur Financier (CSSF) in relation to ESG violations sends ripples down the spine of corporations, what message does this send for the future of ESG regulations across Europe, and is it a warning or a threat from regulators?
Overzealous claims: The case in question
So what really took place at Aviva Investors to have warranted a fine from the CSSR?
It all began following an inspection carried out between 3 October 2022 and 11 May 2023, where the CSSF uncovered “persistent breaches” in the company’s commitment to the Sustainable Finance Disclosure Regulation (SFDR).
The investigation concerned five sub-funds that had been marketed by Aviva Investors as being in line with Article 8 of the SFDR; funds that were said to support and promote “environmental and social characteristics.”
The observations made by the CSSF, however, revealed that one of the sub-funds “failed to comply with the pre-contractual disclosures made in accordance with Article 8,” as five per cent of the fund’s net assets were derived from sovereign bonds whose ESG scores were below the exclusion threshold. This exclusion threshold, designed to screen out sovereign bonds with the worst ESG characteristics, should have excluded any bonds with an ESG rating of less than 4 (using Aviva Investors’ sovereign bond ESG model, which assigns ratings based on a scale of 0 to 10).
The CSSF claims that the disclosures “did not adequately indicate that sovereign bonds with an ESG rating under the assessment of less than 4 could be held by the sub-fund” and that each of the bonds identified by the regulator had an ESG score of between 2.5 and 4.
The ESG characteristics of the other four sub-funds in question, the regulator says, were also not being adequately targeted or monitored.
In an attempt to counter this claim, Aviva Investors points out that “the use of an enhanced due diligence process allows the holding of sovereign bonds with an ESG score of below 4 under certain circumstances.” Nonetheless, by July 2023 the firm updated the disclosures in their prospectus as a remedial measure in a bid to bring better clarity to their processes.
Following this update, and as a result of the cooperation from the company during the investigation, the authority has reduced the sanction to a manageable (for a firm with €287 billion of assets under management) €56,500 penalty, which the CSSR maintains is proportionate to their findings based on failure of compliance and the gravity of the breaches.
The bigger picture
Yet despite the admittedly small fine (which can barely be likened to a slap on the wrist for a company of this size and stature), the sanction still remains a significant milestone for ESG regulation in Europe. Not only is the fine the first to be issued by the CSSR in relation to SFDR violations, but it also marks the beginning of accountability for corporate actors.
According to the European Securities and Markets Authority (ESMA), Article 8 classifications are not awarded by regulators, but rather, financial managers themselves must determine whether their funds promote sustainability. By challenging the classifications that companies have awarded their funds (and in the case of Avivia Investors, being found guilty of overstating the ‘greenness’ of them), regulators are proving that with increased regulatory action comes heightened scrutiny.
For a firm that has boasted about its commitment to sustainability numerous times, Aviva Investors are also eager to diminish the stain of discredibility the penalty has left on its record. The statement released by the fund manager stresses that “Aviva Investors remains committed to ensuring the highest standards of compliance with applicable legal and regulatory requirements” where “we recognise the need to encourage change not just with the companies we invest in, but in our industry and economy as a whole.”
Perhaps then, change may come in the form of greater regulation and accountability for companies that appear to inflate their environmental credibility.
The penalty is also not the first to be issued towards a firm over these past few months for overstating their fund’s sustainability claims. In late September, the Australian Securities and Investment Commission (ASIC) succeeded in bringing a AU$12.9 million (US$8.1 million) sanction against Vanguard Investments Australia for greenwashing violations.
Another company to exaggerate the rigorousness of its ESG exclusion criteria, around 74 per cent of the securities in the Vanguard Ethically Conscious Global Aggregate Bond Index Fund were not screened against ESG benchmarks, according to ASIC. Sarah Court, ASIC deputy chair, reveals: “Vanguard admitted it misled investors that these funds would be screened to exclude bond issuers with significant business activities in certain industries, including fossil fuels, when this was not always the case.”
She continues: “Greenwashing is a serious threat to the integrity of the Australian financial system and remains an enforcement priority for ASIC. It is essential that companies do not misrepresent that their investment strategies are environmentally friendly, sustainable, or ethical.”
Australian federal court judge, Micheal O’Bryan, who ordered the penalty, is also keen to reinforce the implications of the company’s actions. He emphasises: “Vanguard’s contraventions should be regarded as serious. The misrepresentations enhanced Vanguard’s ability to attract investors to the fund and enhanced Vanguard’s reputation as a provider of investment funds with ESG characteristics.”
Therefore, between the CSSF and ASIC, regulators are perhaps demonstrating that greater actions will be taken if legislations are not adhered to.
Shifting currents
So, will 2025 be the year of environmental accountability for companies promoting ESG funds?
According to Vanessa Müller, partner and consulting at EY, the approach of the new year sees ESG as “no longer a matter of choice but a necessity” where regulatory changes should not be simply regarded as something to comply with but rather as an opportunity to drive sustainable finance.
She stresses: “Fund managers will need to scrutinise their investment strategies, ensuring that marketing materials and pre-contractual documents provide transparent and verifiable ESG claims.”
In achieving this, alongside the proposed changes being made to SFDR regulations which may see greater justifications for sustainability claims regarding investments. Müller says, “the year 2025 is poised to be a pivotal moment for funds, banks, financial institutions, and insurance companies as regulatory shifts reshape sustainable finance practices worldwide.”
One such institution that has prided itself on its sustainable commitments, Aviva Investors, has appeared to have fallen under the scrutiny of Luxembourg’s financial regulator.
Yet, as news surrounding Aviva’s sanction from the Commission de Surveillance du Secteur Financier (CSSF) in relation to ESG violations sends ripples down the spine of corporations, what message does this send for the future of ESG regulations across Europe, and is it a warning or a threat from regulators?
Overzealous claims: The case in question
So what really took place at Aviva Investors to have warranted a fine from the CSSR?
It all began following an inspection carried out between 3 October 2022 and 11 May 2023, where the CSSF uncovered “persistent breaches” in the company’s commitment to the Sustainable Finance Disclosure Regulation (SFDR).
The investigation concerned five sub-funds that had been marketed by Aviva Investors as being in line with Article 8 of the SFDR; funds that were said to support and promote “environmental and social characteristics.”
The observations made by the CSSF, however, revealed that one of the sub-funds “failed to comply with the pre-contractual disclosures made in accordance with Article 8,” as five per cent of the fund’s net assets were derived from sovereign bonds whose ESG scores were below the exclusion threshold. This exclusion threshold, designed to screen out sovereign bonds with the worst ESG characteristics, should have excluded any bonds with an ESG rating of less than 4 (using Aviva Investors’ sovereign bond ESG model, which assigns ratings based on a scale of 0 to 10).
The CSSF claims that the disclosures “did not adequately indicate that sovereign bonds with an ESG rating under the assessment of less than 4 could be held by the sub-fund” and that each of the bonds identified by the regulator had an ESG score of between 2.5 and 4.
The ESG characteristics of the other four sub-funds in question, the regulator says, were also not being adequately targeted or monitored.
In an attempt to counter this claim, Aviva Investors points out that “the use of an enhanced due diligence process allows the holding of sovereign bonds with an ESG score of below 4 under certain circumstances.” Nonetheless, by July 2023 the firm updated the disclosures in their prospectus as a remedial measure in a bid to bring better clarity to their processes.
Following this update, and as a result of the cooperation from the company during the investigation, the authority has reduced the sanction to a manageable (for a firm with €287 billion of assets under management) €56,500 penalty, which the CSSR maintains is proportionate to their findings based on failure of compliance and the gravity of the breaches.
The bigger picture
Yet despite the admittedly small fine (which can barely be likened to a slap on the wrist for a company of this size and stature), the sanction still remains a significant milestone for ESG regulation in Europe. Not only is the fine the first to be issued by the CSSR in relation to SFDR violations, but it also marks the beginning of accountability for corporate actors.
According to the European Securities and Markets Authority (ESMA), Article 8 classifications are not awarded by regulators, but rather, financial managers themselves must determine whether their funds promote sustainability. By challenging the classifications that companies have awarded their funds (and in the case of Avivia Investors, being found guilty of overstating the ‘greenness’ of them), regulators are proving that with increased regulatory action comes heightened scrutiny.
For a firm that has boasted about its commitment to sustainability numerous times, Aviva Investors are also eager to diminish the stain of discredibility the penalty has left on its record. The statement released by the fund manager stresses that “Aviva Investors remains committed to ensuring the highest standards of compliance with applicable legal and regulatory requirements” where “we recognise the need to encourage change not just with the companies we invest in, but in our industry and economy as a whole.”
Perhaps then, change may come in the form of greater regulation and accountability for companies that appear to inflate their environmental credibility.
The penalty is also not the first to be issued towards a firm over these past few months for overstating their fund’s sustainability claims. In late September, the Australian Securities and Investment Commission (ASIC) succeeded in bringing a AU$12.9 million (US$8.1 million) sanction against Vanguard Investments Australia for greenwashing violations.
Another company to exaggerate the rigorousness of its ESG exclusion criteria, around 74 per cent of the securities in the Vanguard Ethically Conscious Global Aggregate Bond Index Fund were not screened against ESG benchmarks, according to ASIC. Sarah Court, ASIC deputy chair, reveals: “Vanguard admitted it misled investors that these funds would be screened to exclude bond issuers with significant business activities in certain industries, including fossil fuels, when this was not always the case.”
She continues: “Greenwashing is a serious threat to the integrity of the Australian financial system and remains an enforcement priority for ASIC. It is essential that companies do not misrepresent that their investment strategies are environmentally friendly, sustainable, or ethical.”
Australian federal court judge, Micheal O’Bryan, who ordered the penalty, is also keen to reinforce the implications of the company’s actions. He emphasises: “Vanguard’s contraventions should be regarded as serious. The misrepresentations enhanced Vanguard’s ability to attract investors to the fund and enhanced Vanguard’s reputation as a provider of investment funds with ESG characteristics.”
Therefore, between the CSSF and ASIC, regulators are perhaps demonstrating that greater actions will be taken if legislations are not adhered to.
Shifting currents
So, will 2025 be the year of environmental accountability for companies promoting ESG funds?
According to Vanessa Müller, partner and consulting at EY, the approach of the new year sees ESG as “no longer a matter of choice but a necessity” where regulatory changes should not be simply regarded as something to comply with but rather as an opportunity to drive sustainable finance.
She stresses: “Fund managers will need to scrutinise their investment strategies, ensuring that marketing materials and pre-contractual documents provide transparent and verifiable ESG claims.”
In achieving this, alongside the proposed changes being made to SFDR regulations which may see greater justifications for sustainability claims regarding investments. Müller says, “the year 2025 is poised to be a pivotal moment for funds, banks, financial institutions, and insurance companies as regulatory shifts reshape sustainable finance practices worldwide.”
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