The number of new ESG funds is plummeting as asset managers put the brakes on repurposing existing products amid increased regulatory scrutiny.

Reclassifications of funds claiming to target environmental, social or governance goals have fallen 84% compared with a year ago, led by a slowdown in Europe, according to data complied by Jefferies. New ESG funds built from scratch fell 60% over the same period, marking the first time repurposing hasn’t led industry growth.

“Increased regulatory scrutiny and enforcement in this market is changing behavior,” analysts at Jefferies said in the report.

Regulators in the EU, UK and US are investigating ESG funds amid growing concerns that asset managers keen to sell products are promising more than they can deliver. To meet demand, asset managers have tended to rename existing products rather than build new ones. That’s raised questions about the ESG credentials of the funds, and fed concerns of widespread greenwashing.

A recent analysis by PwC showed that of 8,017 so-called Article 8 funds -- an EU designation that requires a product to “promote” sustainability -- only 989 were new at the end of the second quarter. The rest were reclassifications of existing funds. A similar analysis of 1,061 Article 9 funds -- whereby a product needs to have sustainability as its “objective” -- showed that only 286 were new.

A probe of Article 9 products by Swedish authorities last month found “many cases” in which managers failed to provide necessary information. The Stockholm-based regulator will meet with industry representatives to discuss its findings, and has warned that it will act to stamp out false ESG claims.

Institutional and retail investors have been calling for regulators to do more to protect against greenwashing after years of unfettered growth in the ESG industry. An analysis by PwC showed that 71% of institutional investors want stronger ESG regulatory requirements to guide the actions of the fund management industry. The hope is that extra rules “can act as an important lever to build trust and decrease the risk of mislabeling,” according to PwC.

Asset managers have blamed an absence of clear and consistent rules. The EU led the world with the March 2021 implementation of its Sustainable Finance Disclosure Regulation, but the groundbreaking framework has since been criticized for lacking clarity around key concepts. For example, EU regulators are still waiting for the European Commission to provide detailed guidance on what it means by a “sustainable investment.” 

This article was provided by Bloomberg News.