About 31% of fund assets in Europe have been classified under SFDR as article 8 or 9, with 28% as 8 and 3% as 9. The key findings of the (non-yet-published) ALFI European Sustainable Funds Study 2021 were presented online on 15 June, confirming that sustainable investing is a booming segment. Yet there are still some question marks about the effects of this regulation.
There were about 500 new sustainable funds created in 2020 with a further 200 legacy funds repurposed to fit green investing criteria, according to the report carried out using data and research companies by Morningstar, an independent investment research provider and zeb, one of Europe’s leading providers of management consulting for financial services providers. “It’s clearly showing that product development is accelerating in the sustainable area,” said Carsten Wittrock, partner at zeb Germany. While this is positive news, “some market observers are saying that SFDR may have given the opportunity to some asset managers to greenwash funds,” said Hortense Bioy, global head of sustainability research at Morningstar (photographed above).
How green is my article 8?
Under the sustainable finance declaration regulation (SFDR) asset managers have to either classify their funds as “light green” article 8 funds, “dark green” article 9, or without any green characteristics as article 6. As noted above, there is about a nine to one split in favour of article 8 of the 31% of European funds with a classification, and “we expect these numbers to increase by the end of the year,” said Bioy. “Managers are planning to enhance their existing strategies, reclassify funds, and launch new ones.”
“We found that most funds classified as article 8 funds applied some exclusions,” she noted. So that’s to say those which exclude arms producers, coal producers, tobacco companies, etc. from their portfolio. “The providers of these products considered that the exclusions formed a binding requirement and a core feature of the product in some of these products and this was sufficient for them to be branded ESG (Environmental, Social and Governance),” Bioy added.
Different approaches to exclusion
“Some managers have classified more funds as green than others,” she added, alluding to a different philosophical or maybe even legal interpretation of the text. “Others haven’t classified many funds as article 8, saying they wanted to be prudent and didn’t want to take a soft interpretation of the regulation.” Commenting on this and how the current regulation risks creating perverse incentives she also noted: “this may change as this competitive space evolves.”
However, for some managers taking an exclusionary approach is seen as an unacceptable lowest common denominator choice. “We found some managers, mostly US managers, who said that the funds should promote environmental and social characteristics solely through material ESG factors and through active engagements,” she said. For example, she pointed to some article eight funds which have explicit binding constraints at portfolio level, such as achieving a high aggregate ESG score or a lower carbon intensity than the benchmark.
Even in article 9 (which are supposed to be clearly reserved for vehicles such as impact funds i.e. portfolios that have the intention to generate positive, measurable environmental impact) there are some thickly blurred lines. “We’re also seeing strategies that are very similar to the ones we see in article 8. I think this shows that some managers have either taken a too prudent approach or others have taken a generous approach,” Bioy said.
Data and time lacking
Maybe rather than cynical greenwashing, these mixed approaches are down to the difficultly of measuring the concept of green investing. “Data availability is very limited, and the data quality is not yet that what you need,” said Wittrock. There is also the point that the SFDR deadline was seen by many as being quite tight. Yet even if the European Commission did not intend the article 8 and 9 classifications to become de facto green labels, this appears to have been the consequences with which the market and regulators will have to manage.
As for the asset classes represented, article 8 and 9 funds are most frequent in the equity space, followed by fixed income funds and allocation funds. Close to 90% of assets in article 8 and 9 funds are actively managed, while 11% are passively managed. “We don’t necessarily expect to just see the market share of passive funds increase beyond that level,” said Bioy.
Nordic and Dutch asset managers in particular, featured among those with the highest proportion of fund assets in article 8 and 9, upwards of 70%. “This is perhaps not surprising given the long history of responsible investing in Northern European countries,” said Bioy. These countries were followed by French managers.
Luxembourg performance
Luxembourg was administrating almost a third of the net assets in sustainable funds at the end of 2020. With almost all the market in actively managed funds, this leaves the Grand Duchy well placed. However, in passive products Ireland is in the clear lead, accounting for two thirds of the total, due mainly to US and UK managers tending to favour those jurisdictions. Luxembourg represented 16% of this market, mainly from a broader range of European managers.