Article 8

A recent update of a Luxembourg sustainable finance report notes that two-thirds of the assets under management of Luxembourg UCITS – 2.8 trillion euros at the end of June 2023 – report under one of the two designations set out by European rules for green investing. However, mention of investment-related greenwashing is conspicuous by its relative absence in the report.

While the upgrade of SFDR funds is still in full swing, light green funds did not escape this year’s market violence. Article 6 and Article 8 funds saw a hefty outflow of assets. The greenest funds did manage to attract new assets.

Article 8 funds saw net outflows of 28.7 billion euros in the third quarter of 2022. This was reported by Morningstar in a press release this week. Article 6 funds clearly lost out with an outflow of 62.1 billion euros, according to the financial services provider’s data.

The growing complexity of Europe’s sustainable finance framework and a lack of clear guidance from EU supervisors is leading to a fragmented application of the benchmark EU regulation that determines which investment funds are sustainable and which are not. As a result, the sector is facing what Morningstar’s top ESG expert calls “The Great Reclassification”.

Product launches for Article 8 and 9 funds, sustainability funds and ESG funds are all over the place, but there is no insight into which fund houses are actually putting a lot of assets to work sustainably. Enquiries with Morningstar show that it is certainly not (only) the usual names that have the most assets in sustainable funds.

European mutual funds that promote green investments saw assets increase by some 22 percent in the fourth quarter, to more than 4,000 billion euro, and will overtake traditional ‘grey’ assets in terms of asset volume no later than the summer of 2022, Morningstar said in a research report on the effects of the SFDR sustainability regulation introduced last year.

Luxembourg is by far the leading EU domicile for environmental funds, according to a new report by PwC. Assets under management in green funds in the Grand Duchy are greater than the combined totals of the next three largest domiciles for these products. This article explains why this might be so.

It is very difficult to apply ESG criteria consistently to purely passive investments. Active investments lend themselves much better to this. It is easier to apply an integration approach that goes beyond exclusions in active management. In the end, it is all about the client’s profile, which has to match the risk/reward profile of a fund or strategy and the client’s sustainability preferences. 

Not all European regulations are good. Under the Sustainable Finance Disclosure Regulation (SFDR), part of the EU Green Deal, asset managers must disclose information on sustainability. The objective is thus more transparency and openness in this area. However, from the start the directive was used as a means to classify funds.

The bar for sustainability criteria is rapidly being raised. Article 8 under the new SFDR legislation will become the lower limit for a sustainable product, and the stricter Article 9 will become the standard for truly “green” products and investment funds. And do not underestimate the impact of Principal Adverse Impact reporting.