(Bloomberg) -- Asset managers have now removed the European Union’s top ESG designation from at least $125 billion in portfolio funds, as figures from Axa Investment Managers add to the industry total. 

The French investment firm, which said earlier this year it was in the process of downgrading 45 so-called Article 9 funds, said Tuesday the move has affected €20 billion ($21 billion) of portfolio assets. The figure represents market values at the end of June and includes open-ended funds and other mandates, an Axa spokesperson said. 

Asset managers including BlackRock Inc., Amundi SA and Goldman Sachs Group Inc.’s NN Investment Partners are among those to have stripped the Article 9 designation from funds after the EU said it must be reserved for 100% sustainable investments, with some allowances for hedging and liquidity. That’s a threshold that less than 5% of Article 9 funds actually meet, Morningstar Inc. said in its third-quarter analysis of the industry. The development risks angering clients and has led to criticism of the EU’s environmental, social and governance investing rules, known as the Sustainable Finance Disclosure Regulation. 

Europe’s top retail investor group, Better Finance, has already demanded meetings with the EU Commission and the bloc’s markets watchdog, ESMA, to seek assurances that such reclassifications aren’t exposing client savings to greenwashing. 

ESMA chair, Verena Ross, has made clear she’s intent on “investigating greenwashing more closely.” What a fund calls itself “is one of the most significant identifiers of investment funds for investors, especially retail investors, and a great marketing tool,” she said in a Dec. 6 speech. “We are concerned that some funds are using ESG or sustainability-related terms in their names without necessary living up to the corresponding sustainability features.”

Axa’s head of sustainability coordination and governance, Clémence Humeau, has said the firm’s goal is to “explain the long-term intention and the short-term challenges” of the EU rules to clients. It’s all about being “proactive and transparent in our communications with clients,” she said in October.

She also said the wave of reclassifications has led some to question the value of SFDR designations. “There is now a widespread understanding within the industry of the limitations of the system,” Humeau said.

The EU Commission is now looking into the confusion surrounding SFDR fund classes and preparing a comprehensive assessment of how market participants are adapting to the regulation, according to financial markets and services commissioner, Mairead McGuinness. She recently told lawmakers that asset managers have adopted a softer interpretation of the EU’s ESG rulebook than was intended by its authors. 

It’s clear that asset managers have been “liberal with their interpretation” of SFDR, McGuinness said. She also acknowledged that the industry is worried about the ramifications of having misread the EU’s ESG rules.

“I’m very aware of fears within the financial sector around legal and reputational risks,” she said. “And of course, investors, supervisors and civil society are concerned because there’s a lack of clarity. This creates opportunities for greenwashing.”

--With assistance from Steven Arons and Frances Schwartzkopff.

(Adds comment from ESMA chair in fifth paragraph)

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