Even after 40 percent of the EU’s most sustainable fund assets was downgraded during the fourth quarter, managers of investment funds with an outspoken sustainability profile are still not sure whether their funds meet the requirements for ESG investments under the EU’s Sustainable Finance Disclosure Regulation.
Further downgrades are expected during the coming months.
Since September last year, about 420 products have changed their status under the regulation, known as SFDR. Some 307 were downgraded to ‘light green’ Article 8 from ‘dark green’ Article 9, representing 175 billion euro, or 40 percent of the Article 9 category, according to Morningstar data. More reclassifications are expected as new prospectuses are processed, the fund analytics firm said.
“We expect reclassification of funds from Article 9 to Article 8 to continue in the coming months although the number and timing depend on the EU Commission’s answers to the ESAs’ letter,” Hortense Bioy (photo), Morningstar’s global director of sustainability research, told Investment Officer, referring to recent comments by the European supervisory authorities for the financial sector, also known as ESAs.
Awaiting clarification
“Some managers have decided to wait for the EU commission to clarify the definition of sustainable investment and other aspects of SFDR,” Bioy said.
The ESAs, which includes the European securities and markets authority Esma, in November stepped up their approach to greenwashing. To make sure investors are not misled, Esma proposed criteria for using ESG or sustainability-related terms in fund namessma and launched a call for evidence to understand key features, drivers and risks associated with greenwashing. The European Commission this summer is expected to clarify its views on where the SFDR should draw the lines.
Fearing they’ll be accused of greenwashing practices, many asset managers, including heavyweights like Amundi, BlackRock and Janus Henderson, have chosen to play safe by lowering their classification of Article 9 funds, known as the top sustainability category. The downgrades mean that more funds now are classified as Article 8.
Article 9 passive funds now at 5%
The downgrades included sizable index funds and exchange-traded funds tracking EU Climate benchmarks. The market share of Article 9 passive funds shrunk to 5 percent from 24 percent, according to Morningstar.
Almost two thirds, or 63 percent, of Article 9 funds now plan to have more than 70 percent exposure to sustainable investments, Morningstar said. Only 6.3 percent of Article 9 funds target between 90 and 100 percent. Only 36 funds in the Morningstar sample aim for a 100 percent sustainable investment allocation.
During the fourth quarter of 2022, Article 8 funds attracted 10.7 billion euro in net new money. Article 9 funds pulled in the lowest inflows on record, 5.1 billion euro, partly due to the recent wave of downgrades.
Total assets in Article 8 and Article 9 funds rose by 7.3 percent over the period to 4,600 billion euro, pushing their combined market share higher to 55 percent.
Just over a quarter, or 27 percent of Article 8 funds with “sustainable” in their names would meet the European Securities and Markets Authority’s proposed rule on fund names, while the vast majority - 93 percent - of Article 9 funds would meet the requirement.