SFDR Article 8 has become a ragbag of investments that can be both green and grey, several experts say. Fund houses offering Article 8 products do not seem to set the bar very high.
While Article 8 products promote environmental or social features, they do not have a sustainable investment objective. While this does not detract from the fact that such products can still be green, fund houses do not seem very ambitious in their sustainability goals for Article 8 funds.
Experts at AF Advisors say that providers of 8 products in most cases include “a very limited allocation” to sustainable investments in their disclosure. Consultants Anne Kuijken and Indira van Uyten arrived at a minimum allocation of 1 to 20 per cent, they wrote in February based on their own research among the 25 largest fund houses operating in the Netherlands. “Asset managers thus retain a lot of room to be allowed to invest in non-sustainable investments as well.”
French regulator AMF concluded a month later, after vetting nearly 11,000 funds, that an average Article 8 bond fund is actually not even that different from a 6 fund in terms of exposure to harmful fossil fuels. It indicates that an 8 product does not have to be directly greener than a 6 fund.
According to Lars Dijkstra, chief sustainability officer at Van Lanschot Kempen, the interpretation of a green investment is constantly changing. In this respect, he says it is difficult to say what really distinguishes an 8-fund from a 6-fund. “Ultimately, SFDR is about being transparent about your sustainability goals. If you cannot or will not deliver positive impact, then you choose 6. For us, that reason is clear: if we don’t have the data and can’t reliably classify a fund, it automatically falls under Section 6 for us.”
Sustainability info leaves much to be desired
Although fund houses have different approaches to sustainability, Kuijken and Van Uijten see that they formulate similar environmental and social characteristics, and corresponding sustainability indicators and binding elements. Providers mainly cite exclusions, active shareholding, integration of ESG factors and climate change as key environmental and social features of Article 8 products.
Still, all is not getting easier for investors. According to Kuijken and Van Uijten, the findability of sustainability information for Section 8 products leaves much to be desired, while not all asset managers follow the legally prescribed template, which lists the sustainability characteristics of a financial product. And that template is precisely what is so important: that is what SFDR, as a disclosure regulation, is for, AF Advisors’ experts argue.
In this way, SFDR 8 becomes a collection of both green and grey products and everything in between. To still separate some of the wheat from the chaff, another 8+ has been coined by the market. This unofficial stamp is put on funds that do not qualify for Article 9, but do have the ambition to be greener than an average 8 product.
Supply of 8 funds widened
The vast majority of funds for sale in the Netherlands fall under 8. Only 5 per cent of all investment funds in Europe are classified as 9 products, figures from AF Advisors show.
In 2022, many 9 funds fell back to 8. Robeco, NN Investment Partners, Invesco, Pimco and Van Lanschot Kempen, among others, decided to reclassify their most sustainable funds in response to plans by national regulators to adopt stricter criteria for Article 9 funds.
Still, according to Dijkstra, the Netherlands is among the frontrunners in the European Union with relatively many 8+ and 9 funds, as are France and many Scandinavian countries. Among US asset managers offering their funds in the European market, the number of 6 funds is very high and the UK seems to be moving along with continental Europe.
Van Lanschot Kempen currently has mainly 8 and 8+ funds on offer, in addition to a few 9 funds. The fund house has classified the 8 funds as responsible and the 8+ funds as sustainable. 9 includes impact funds. ‘There are some parties that do classify funds that we consider 8+ as 9. For us, companies in 9 funds must have a real intention to make impact.’
Kuijken and Van Uijten of AF Advisors do see that providers have become more cautious in their classifications, as a result of regulatory actions to combat greenwashing.
Esma: bar needs to be raised
And this is necessary, as regulator Esma wants to raise the bar for funds that label themselves as sustainable.
From next year, for instance, the word sustainable will only be allowed in the fund name if at least 50 per cent of the investment portfolio consists of companies classified as sustainable in line with the definition in SFDR.
“That proved to be a very high threshold until six months ago,” said Dijkstra. The MSCI benchmark, for instance, consisted of only 12 to 15 per cent sustainable companies. “And then it becomes very difficult to get to 50 per cent, especially if you also want a well-diversified portfolio.”
The market is developing “tremendously”, according to Dijkstra, and more data is now available, including from companies reporting on sustainability.This should eventually make it easier to get to that 50 per cent. Dijkstra thinks most of Van Lanschot Kempen’s sustainable funds will be able to meet the 50 per cent target by next year.
It is also expected that the more data is available, the more often parties will include Taxonomy-aligned investments in their investment policies. ‘Almost all Article 8 products now indicate 0 per cent here, as very few companies have reported on this so far,’ AF Advisors said.