Stay informed with free updates
Simply log in to the Exchange traded funds myFT Digest – delivered straight to your inbox.
Latest news about ETFs
Visit our ETF Hub to learn more and explore our in-depth data and comparison tools
A clarification by Brussels on the application of the Sustainable Finance Disclosure Regulation has not led to the wave of fund upgrades that many had expected.
More than 300 funds were downgraded from ‘dark green’ Article 9 – which must explicitly follow a sustainable investment strategy – to Article 8 in the last quarter of last year.
The reductions in Article 8 – which is supposed to promote sustainable or environmental features but does not have sustainable investing as a core objective – were largely the result of regulatory gaps, experts said at the time.
In April the European Commission issued a statement on how asset managers should determine whether investments are sustainable or not, giving asset managers more regulatory flexibility.
The intervention was expected to result in a large number of Article 8 funds being upgraded to Article 9, but that wave did not materialize.
Only 35 funds have made this upgrade so far this year, including 15 in the third quarter, according to Morningstar data.
Hortense Bioy, global director of sustainability research at Morningstar, said most managers of Paris-aligned benchmarks and passive climate transition benchmarks do not see upgrading Article 8 funds as essential.
Some managers were actively engaging with regulators and the market to decide whether or not to upgrade the funds, while others chose to wait for the SFDR review, which was released as a consultation document in September and may require a ‘comprehensive review ‘ of the regulations. SFDR, Bioy said.
Raza Naeem, partner at Linklaters, said SFDR was still in “a state of flux”, which explained why the current reclassification rate was “quite low”.
“[Managers] especially take SFDR into account [ . . . ] assessments, which will invariably lead to further tightening of standards,” he added.
Naeem said he expected the number of reclassifications to increase following the publication of the final version of the European Securities and Markets Authority’s guidance on the use of environmental, social, corporate governance and sustainability terms in fund names, which may could have a “major impact”. ” on fund classifications.
Detlef Glow, head of research for Europe, the Middle East and Africa at Refinitiv Lipper, said the SFDR product classifications are still “a moving target” for funds.
Glow said the lack of a standard definition for what constitutes a sustainable investment makes it difficult for asset managers to settle on a single product category.
Managers also remained “cautious” and hesitant to upgrade their funds, fearing the impact on the investor experience and their credibility, in case “the position at EU level changes”, Naeem said.
Bioy agreed, saying most managers were concerned about “customers not understanding flip-flopping.”
Even if managers refrained from upgrading the funds, there was no “commercial pressure” to reclassify them as investors had not expressed dissatisfaction with the downgraded funds, Bioy said.
Bioy noted that inflows into the 300 funds downgraded in the last quarter of 2022 were 40 percent higher than those into Article 9 products in the first nine months of 2023.
Funds downgraded from Article 9 to Article 8 before 2023 have previously had lower inflows than Article 9 funds.
Ottilly Mould, sustainable finance leader at consultancy Nordic Sustainability, said there was still a “high barrier” to SFDR due to its “complexity and inaccessibility”, driven by the lack of a standard definition for what constitutes a sustainable investment .
“The sheer volume of conflicting guidelines is enough to put people off,” she said.
However, some fund managers had taken “comfort” from the commission’s clarification to upgrade their passive funds again, Naeem said.
*Ignites Europe is a news service published by FT Specialist for professionals working in the asset management sector. Trials and subscriptions are available at igniteseurope.com.