The introduction of the EU Sustainable Finance Disclosure Regulation should enable investors to better assess investment funds on their sustainability merits. The framework divides the fund landscape into three groups, with so-called Article 9 funds designated as the most sustainable, or dark green funds.
In March 2018, the European Commission approved the Action Plan on Financing Sustainable Growth. The plan has ten key actions to be taken to achieve the 2050 carbon neutrality target. Part of the plan is also the EU Sustainable Finance Disclosure Regulation, or SFDR for short, which was introduced in December 2019.
The rules of the SFDR complement the regulations for providers and advisors of financial products. Broadly speaking, fund houses must disclose to investors how sustainability risks are taken into account in their investment process, what metrics they use to assess ESG factors and how they consider investment decisions that may have negative effects on sustainability factors. Thus, the main objective of the SFDR is to increase the transparency and comparability of ESG information for end investors and thus minimise so-called greenwashing.
The SFDR divides investment funds into three different types with differences in sustainable objective and levels of disclosure requirements. Funds classified as Article 9 have sustainable investing as their objective and can therefore be referred to as dark green funds, or impact funds.
In contrast, Article 8 funds only aim to promote environmental or social aspects and are thus more likely to be light green funds, or ESG funds. Finally, there are the Article 6 funds which include all other funds that have no specific or explicit sustainability objective.
Almost 900 Article 9 funds
At the end of March 2022, Europe had a total of 898 funds categorised as Article 9, according to a Morningstar review. That is equivalent to a market share of 3.6 percent. So dark green funds are still a niche in the mutual fund market. By comparison, with a total of 6,862, there were many times more light-green Article 8 funds.
In total, investors have entrusted Article 9 funds with about 450 billion euro in assets. These are mainly equity funds as 79 percent of the assets under management are invested in equity funds.
Bond funds manage only 16 percent of the money invested in Article 9 funds. By far the most popular category among Article 9 funds is the Morningstar category Equity Sector Ecology, which represents 22.3 percent of total assets under management in Article 9 funds. The second largest category is the Morningstar Global Large-Cap Mixed Equity category with 16.7 percent market share.
This week’s top five lists the five largest Article 9 funds, as measured by the distribution fee-free share class available in the Netherlands, when ranked by fund assets, regardless of Morningstar category.
Pictet in the lead
The ranking is dominated by Swiss fund house Pictet, which is a big name among thematic funds. This is also evidenced by the number one position for Pictet-Global Megatrend Selection, which has a fund capital of no less than 11 billion euros. The fund, which has a Morningstar Analyst Rating of Bronze, follows a multi-strategy approach, which means that it invests underlying the twelve thematic equity funds of Pictet.
Several of these underlying strategies are also substantial. For instance, Pictet-Water claims the third place in this ranking, but also Pictet-Security (7.1 billion euro) and Pictet-Robotics (6.5 billion euro) have considerable fund assets. Of the 12 thematic funds, eight are also classified as Article 9 funds, while the others are Article 8 funds. The funds are managed by Pictet’s thematic equities team, led by Hans H. van der Linden.
The funds are managed by Pictet’s thematic equities team, led by Hans Peter Portner, with a total of 41 investors who are a mix of highly experienced team members and more inexperienced talents.
Nordea 1 - Global Climate & Environment
In second place is the over 10 billion euro ecological equity fund Nordea 1 - Global Climate & Environment, which has now closed its doors to new entrants due to strong investor interest. The fund is one of the older strategies in the Morningstar Ecology Equity category and has been managed by the duo Thomas Sørensen and Henning Padberg since its launch in 2008.
Ronald van Genderen is a senior manager research analyst at Morningstar. Morningstar analyses and evaluates investment funds on the basis of quantitative and qualitative research. Morningstar is one of Investment Officer’s knowledge partners and ranks five investment funds or providers each week.