The EU’s top category of sustainable investment funds - impact funds as defined under SFDR Article 9 - saw inflows double in the third quarter compared to the second, while funds that are considered mostly sustainable - Article 8 ESG funds - continued to bleed, research insights by Morningstar show. The analysis also shows that more than 380 funds were reclassified during the third quarter.
The market share of Article 8 and Article 9 fund assets continued to increase and reached 53.5 per cent at the end of September, Morningstar said.
In the third quarter of 2022, Article 8 funds bled 28.7 billion euro, only slightly less than in the previous quarter, against a continuously challenging backdrop of high inflationary pressures, a looming global recession, and geopolitical risks following Russia’s invasion of Ukraine. Despite that backdrop, Article 9 products recorded inflows of 12.6 billion euro, double those of the second quarter, boosted by passive strategies, Morningstar’s third-quarter review said.
380 funds reclassified
Over 380 products changed their status under the EU’s Sustainable Finance Disclosure Regulation, SFDR, in the last quarter. The vast majority were upgraded to Article 8 from 6, but 41 were downgraded to Article 8 from 9. Morningstar expects more to follow suit in the coming months.
While nearly all - 95 per cent - of Article 8 and Article 9 funds report considering Principle Adverse Impacts, or PAIs, still less than half - 48 per cent - disclose a minimum percentage of sustainable investments, and just one third report a minimum percentage of taxonomy-aligned investments, Morningstar said.
“In the last three months, we saw more funds upgraded to Article 8 as asset managers continue enhancing their offerings to meet investor demand for more ESG and sustainable strategies,” said Hortense Bioy, Global Director of Sustainability Research at Morningstar.
Exposure threshold remains an issue
Less than five per cent of Article 9 funds target sustainable-investment exposure between 90 per cent and 100 per cent, and only 26 funds aim for a 100 per cent allocation to sustainable investment, raising questions about the feasibility of the new regulatory guidance, the research said.
Funds are still awaiting clear guidance from financial regulators on this exposure threshold. Some national authorities, such as the one in the Netherlands, have guided on 100 per cent, sparking downgrades, or reclassifications, of funds at asset managers such as NN IP, Robeco and Kempen. Luxembourg’s CSSF has yet to provide its guidance.
Acceleration of downgrades
“We also saw an acceleration of downgrades from Article 9 to Article 8,” said Bioy. “These downgrades are the result of new regulatory guidance and by no means reflect changes in the strategies. We expect this trend to continue in the coming months as asset managers adjust to the requirements of the second level of SFDR starting in January 2023.”
Earlier this week, the UK’s Financial Conduct Authority said it will set its exposure threshold for the most sustainable funds and impact funds at 90 per cent. That level is expected to be copied by other national regulators in EU countries.
Assets in Article 8 and Article 9 fund rose by almost 3 per cent over the third quarter to EUR 4.3 trillion. In comparison, Article 6 fund assets dropped by 9.6 per cent, Morningstar said.
Taxonomy
Of the Article 8 and Article 9 products that report taxonomy alignment, 85 per cent provide 0 per cent values, while a mere 2 per cent of Article 9 funds target exposure to taxonomy-aligned investments higher than 10 per cent, Morningstar said.
Quarterly flows into Article 8 and Article 9 funds versus Article 6 funds (EUR billion)
Source: Morningstar
Quarterly number of fund launches
