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| | All change ahead for Article 8 and 9 funds Europe’s darkest green funds continue to haemorrhage money with investors in funds classified Article 9 under the Sustainable Finance Disclosures Regulation (SFDR) withdrawing EUR 6.2 billion in Q2 this year alone.
This is the third consecutive quarter to record an outflow and is the largest on record for Article 9 funds.
Whether these investment strategies are on borrowed time depends on the European Commission’s assessment of a review of the SFDR it carried out late in 2023.
Already there is swirling speculation that Article 8 and 9 funds could disappear, or at the very least be revised.
This week we report predictions from funds service provider Ocorian which says it has "analysed clues" from the formal review and predicts the Article 8 and 9 classifications might be revised or supplemented with new categories "to offer more clarity and comparability between different products".
Clarity on the classifications under SFDR would be widely welcomed. Articles 8 and 9 have received heavy criticism since SFDR came into force in 2021, with critics such as abrdn Investments calling them "inadequate".
Dan Grandage, Head of Sustainable Investing at abrdn, said: "They don’t give investors an accurate reflection of the diverse environmental, social and governance investment approaches. This is because of the vagueness around, for instance, the concept of "promotion", and that the articles don’t adequately capture key strategies, such as transition finance."
Meanwhile INREV, the investors association for non-listed real estate, says Article 8 and 9 should be scrapped completely and replaced with a new regime.
However, the challenge for the commission before it even attempts to rethink classifications, will be in ensuring the SFDR achieves its ultimate aim to eliminate greenwashing.
An advisable place to start would be to provide a clear definition of sustainable investments which at present is absent from the regulation. Instead fund managers are left to interpret sustainability as they see fit – hardly a platform for consistency and clarity.
As Hatim Baheranwala, Cofounder and CEO of Treety, Ocorian’s ESG reporting partner, says: "The decision of allowing investment firms to establish their own definition for terms such as "sustainable investments" has led to even more confusion in the market, where differing firms have developed very diverse definitions for these terms."
One promising development for the SFDR review is the European regulator’s decision to consider aligning with the UK’s Sustainable Disclosure Requirements (SDR).
Under the SDR all products using a label must have a sustainability objective which is an explicit statement of intention to invest ‘with the aim of directly or indirectly improving or pursuing positive environmental and/or social outcomes’.
The Commission is now asking the market if labels are preferable, and it will be interesting to see if there is acceptance of the definitions under the UK’s regime.
Gill Wadsworth, Editor, Institutional Asset Manager
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| | | | | | | | | | All change ahead for Article 8 and 9 | | The much-maligned Article 8 and Article 9 classifications, which identify the most sustainable funds under the EU’s disclosure regime, look likely to be overhauled next year. |
| | | | | | | | | | | New ‘frontiers’ in emerging market investing Kristin J Ceva, Managing Director, Payden & Rygel, writes that Emerging Market Debt (EMD) has continued to develop as an asset class, bringing with it a new subset of countries—EM frontiers. |
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