More than a fifth of European Ucits funds claim to be compatible with Article 8 or 9 of the new European Sustainability Regulation SFDR in their prospectus. ‘Interpretation of the definitions varies greatly, with some managers taking a much looser approach than others,’ notes head of sustainability research at Morningstar Hortense Bioy in conversation with Investment Officer.
A fund complies with Article 8 of the SFDR if it promotes sustainability in its investment policy, and is compatible with Article 9 if it specifically focuses on sustainable investments. According to Morningstar, 18% of investment funds call themselves compatible with the ‘light green’ Article 8, and a further 3.6% believe they are ‘dark green’. The data provider bases these conclusions on an analysis of fund prospectuses of approximately half of all Ucits funds domiciled in Luxembourg.
The analysis reveals large differences between fund houses. Asset managers with their headquarters in France, the Netherlands and Scandinavia are the frontrunners. BNP Paribas and Amundi have by far the most registered Article 8/9 funds (see chart). According to Bioy, it’s no coincidence that both of these asset managers are headquartered in France. ‘Reporting on ESG risks has been mandatory in France for a while. That is why these asset managers are more easily compliant with the new regulations. A fund label for SRI funds already exists in France. ‘All funds with this ISR-label are likely to self-classify as Article 8 or 9,’ says Bioy.
Robeco
With regards to article 8/9 funds as a percentage of assets under management, the Dutch asset managers Robeco and NN IP and their Nordic competitors SEB, Handelsbanken and Nordea, among others, score particularly high. Their Article 8/9 funds account for at least two-thirds of their assets under management. ‘This probably has to do with the fact that investors in those countries are ESG-frontrunner’, according to Bioy.
Indeed, the contrast with the large Anglo-Saxon fund houses is marked: asset managers like Fidelity, Schroders, LGIM, BlackRock, Vanguard and JP Morgan AM hardly have any Article 8/9 funds to show for. In the case of Blackrock and Vanguard, the fact that these fund houses manage many ETFs could also play a role in their low score. ‘The vast majority of Article 8/9 funds are actively managed. Of all Article 8/9 funds, only 5-10% are ETFs,” says Bioy.
Abuse
US asset managers in particular also sometimes seem to take advantage of the fact that the European Commission has still not been able to give a clear definition of what ‘promoting sustainability’ really means. This is despite repeated calls for this by Europe’s supervisors (link). ‘That’s why it doesn’t really mean anything if you call your fund compatible with Article 8 or 9. For example, I often see the same type of funds being classified as Article 8 and the other time as Article 9. Investors should therefore certainly not regard compatibility with the SFDR as a sustainability label,’ says Bioy.
Bioy explicitly mentions Alliance Bernstein as a possible greenwasher, although she says she prefers not to use this term. ‘Alliance Bernstein (AB) is among the managers that currently have the softest interpretation of Article 8 definition as it has classified as Article 8 funds that do not use explicit and binding ESG criteria. AB funds classified as Art 8 merely integrate ESG considerations and engage with companies, like many other asset managers claim to do.”
According to Bioy, some Europeans firms have taken a more explicit and transparent approach. ‘For example, the French fund houses take the view that there must be binding criteria that companies must meet in order to be eligible for inclusion in the fund.’
‘Article 8 will become mainstream’
Conversely, it may well be the case that some fund houses deliberately wait to classify their funds as Article 8 or 9 until there are clearer definitions of this. ‘Some asset managers may opt for a wait-and-see approach as they want to avoid the risk of classifying a fund prematurely as Article 8 or 9.’
Bioy stresses that the SFDR has only just been introduced and that the percentage of funds that declare themselves compatible with Article 8 or 9 is likely to increase significantly in the coming years. ‘At the end of the day, depending on how the regulator clarifies the definitions, we could end up with 60% or more funds in Europe that self-classify as Article 8 or 9. After all, I don’t know of any asset manager who doesn’t say he’s doing ESG integration.’
Also, many have said that most of the new funds they will launch going forward will have distinct sustainability or impact characteristics. This alone will eventually make an Article 8 or 9 classification mainstream, Bioy believes. ‘For example, you can think of a minimum level that funds have to meet in terms of sustainability.’
Equity funds less overrepresented than expected
49% of funds with an Article 8/9 classification are equity funds. ‘That’s 10 %-point more than you might expect based on the market share of equity funds, but honestly I expected a larger percentage of equity funds and a smaller percentage of bond funds,’ Bioy said. That is 29%, in line with market share. Indeed, it is much easier for equity managers to integrate sustainability criteria than for bond fund managers. Bioy says: ‘Often the interest rates on debt securities of companies with a higher ESG rating are relatively lower, and therefore less attractive to investors.’