The Sustainable Finance Disclosure Regulation marks its second anniversary next month. Although it was quickly adopted as a sustainability label, its actual purpose was to provide a framework for communicating the extent to which sustainability plays a role within an investment fund. Adjusted rules that took effect in January 2023 caused a stir in the sustainable fund landscape.
In March 2021, the EU’s Sustainable Finance Disclosure Regulation entered into force. The framework set standards for disclosure of the extent to which sustainability plays a role within an investment fund. However, it was soon seen by both investors and fund houses as a sustainability label. In doing so, they classify funds according to which article a fund falls under, e.g. so-called Article 8 funds are seen as «light green» and Article 9 as «dark green». In addition, funds can still fall under Article 6 if sustainability does not play a role.
In January 2023, the SFDR rules were tightened. From then on, fund houses are required to publish more information on their funds› ESG approaches, sustainability risks, and impacts in pre-contractual documents, such as the prospectus, and periodic reports, including the fund fact sheet. In preparation, many fund houses have been reviewing the classification of their funds towards the end of 2022.
420 funds changed SFDR status
This has not left the landscape untouched. Prior to the enhanced disclosure regime, many managers revised the classification of their funds and in many cases that meant a downgrade from Article 9 to Article 8. As of September 2022, a total of 420 funds had changed SFDR status. Among them, 307 were downgraded to Article 8 from 9 and collectively these funds accounted for €175 billion in assets under management, equivalent to 40% of all funds that previously had an Article 9 classification.
Although investors appear to have continued strong interest in sustainable funds, the fourth quarter of 2022 saw the lowest inflows for Article 9 funds since the SFDR was introduced in 2021. A total of €5.1 billion flowed into these funds. Partly, the decline in investor money inflows was explained by the large number of funds downgraded to Article 8.
Although the process of revisions by fund houses is probably not yet fully completed, there already seems to be a clear move towards sustainability of the Article 9 offering.
Article 9 funds’ ESG exposure rising
Almost two-thirds (63%) of Article 9 funds now plan to have more than 70% exposure to sustainable investments, compared to just 47% in September 2022. In addition, 6.3% are aiming for a percentage between 90 and 100 compared to 4.8% previously.
This week’s top five lists the five global equity funds (of which a distribution fee-free share class is available in the Netherlands) classified as Article 9 under SFDR that had the highest inflows of investor money in 2022.
GMO Climate Change Select Investment Fund
GMO Climate Change Select Investment Fund was the most successful in raising new money in 2022. The fund was launched at the end of February 2022, so its inflow of just over €300 million is almost equal to the current fund assets. It is a more concentrated version of the GMO Climate Change fund, which has a Morningstar Analyst Rating of Bronze. The fund of the Boston-based firm is managed by experienced duo Lucas White and Thomas Hancock. They take a value-focused approach and aim to invest in companies that are positioned to benefit from efforts to mitigate or adapt to climate change.
Runner-up is Wellington Global Stewards which saw the counter of new money stop in 2022 just before tapping the €300 million mark. The fund from the US fund house has been managed by Mark Mandel and Yolanda Courtines since inception in 2019. Both have a long track record as analysts at Wellington, with Mandel joining in 1994 and Courtines in 2006. They employ a sensible process aimed at finding companies that combine a high and sustainable return on invested capital with strong ESG characteristics. In their search, they are supported in part by Wellington’s central research team of around 50 analysts. In the US, the strategy is available through Vanguard Global ESG Select Stock Fund, which has a Morningstar Analyst Rating of Bronze.
The last spot on the podium is for Candriam Sustainable Equity Circular Economy which had around 285 million euros of inflows in 2022. This is notable as there was a significant changing of the guard among the fund’s managers, but that has not stopped investors from entrusting more of their money to the new managers. The original managers, Monika Kumar and Koen Popleu, left Candriam at the end of December 2021 and were replaced by the trio of David Czupryna, Bastien Dublanc and Johan Van Der Biest. The approach seeks the future leaders of the circular economy and falls within the Morningstar Equity Sector Ecology category.
Article 9 funds with the biggest inflows:
Ronald van Genderen is senior manager research analyst at Morningstar. Morningstar analyses and evaluates investment funds based on quantitative and qualitative research. Morningstar is one of Investment Officer’s knowledge partners and ranks five mutual funds or providers every week.