As many as 70% of the ETFs touted as the most sustainable in their class by the fund companies that offered them have been downgraded in one year. Rather than aiming for sustainable investment, passive funds were found to incorporate only one ESG factor.
This is according to data published in March by Trackinsight, a French database. “According to our data, of the 232 ETF share classes initially classified as Article 9, as of 31 December 2022, 177 had been re-classified as Article 8 with only 55 share classes still retaining their Article 9 classification,” said Anna Ataei, editor-in-chief at the database. “Based on this data, 76.29% of Article 9 share classes have therefore been reclassified.”
Earlier this year, Bloomberg Intelligence cited a percentage of ‘more than 70%’ of ETF downgrades previously falling under Article 9 under the Sustainable Finance Disclosure Regulation (SFDR).
According to Bloomberg, the reclassification to Article 8 occurred before the SFDR Level 2 requirements came into force on 1 January 2023. The new requirements require the provider of a product classified as Article 8 or Article 9 to provide a breakdown of the proportion of taxonomy-aligned investments, sustainable investments, and ‘other’.
Randy Patisselanno, a columnist at Investment Officer Netherlands, wrote last October that “it is (still) unclear what exactly constitutes a sustainable investment under the SFDR, given the broad legal definition. (…) You either meet a certain ‘green’ qualification or you do not. The whole system is based on the ‘pass or fail’ principle, with no green shades.”
Clarification
A massive reclassification of Article 9 funds to Article 8 under the SFDR sustainability regulation has been underway for some time. The clarification of the definition of Article 9 by the European Commission and the warning from a growing number of national supervisory authorities that they will apply strict criteria to Article 9 funds has led to adjustments.
“Many asset managers have recognised that adjustments are needed to classify their products correctly and, as we have seen, have taken steps to address this,” Trackinsight adds.
Conservative approach
Amundi, Europe’s largest fund company, said at the time that “the current regulatory framework did not yet allow the financial industry to react in a consistent way to what should and should not be considered sustainable.” “Given this ever-changing regulatory environment, Amundi has opted for a conservative approach to the levels of sustainable investment published in its regulatory documentation,” the asset manager told Investment Officer Luxembourg at the time.
A few months before the big reclassification move, Morningstar had already warned about the wave of adjustments to sustainability labels. The fund rating specialist expected downgrades in sustainability, especially from Dutch investment funds.