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The investment fund industry could key in on the transition to a low-carbon economy, but the sustainable fund sector is currently too small and struggles with data and greenwashing challenges, says the International Monetary Fund (IMF).

In the latest edition of its report on global financial stability, the IMF examined the sustainable investment fund sector, which it said could “be an important driver of the global transition to a green economy” by supporting corporate behaviour that advances the transition.

“Flows into sustainable funds appear to support climate stewardship and encourage the issuance of securities by firms with a more favourable sustainability rating,” it said.

However, the current industry is “too limited in size and scope to have a major impact,” it said.

Only about 7% of global assets under management are invested in sustainable funds, and just 0.25% are devoted specifically to climate-focused funds, it noted.

Additionally, fund managers face a number of challenges, it said, “including data gaps, risk of corporate greenwashing, multiple disclosure standards, and a lack of globally accepted taxonomies — in implementing investment strategies that support the transition.”

For the sustainable fund sector to help catalyze the low-carbon transition, the report said that policy-makers should step up regulatory oversight to tackle greenwashing while also standardizing data, disclosures and sustainable finance classifications for both firms and investment funds.

Once the greenwashing and the data issues have been tackled, policy-makers should introduce tools to channel savings toward transition-enhancing funds, “such as financial incentives for investments in climate-oriented funds” to complement other measures, such as carbon taxes, it suggested.

Asset managers could also do more to attract investors with specific environmental goals by emphasizing “the distinction between the broad concept of sustainability (which encompasses environmental, social and governance issues) and purely climate considerations,” it said. “They could also increase offerings of funds with well-defined and specific climate-change-mitigation objectives.”