Article 9 funds pick up outflows from funds with lower sustainability aims

Investors have withdrawn money from funds categorised as ‘Article 8’ under EU sustainable investment funds and appear to have re-allocated a portion of it to ‘Article 9’ funds that are more committed to sustainability, according to data.

However, the funds allocated to Article 9 were the lowest on record.

In total, net outflows from Article 8 funds €14.6 billion in the second quarter of 2023, and put €3.6 billion into Article 9 funds.

Article 9 have the highest level of sustainability commitments under the EU’s Sustainable Financial Disclosures Regulation (SFDR).

Morningstar, in its SFDR Article 8 and Article 9 Funds: Q2 2023 in Review report, said assets in Article 8 and Article 9 funds rose by 1.4% over the second quarter and for the first time passed the €5 trillion milestone.

The fund data firm has previously highlighted that many funds were reclassified by their sponsors from Article 9 to Article 8 – a measure seen to reflect fund managers reacting to the risk of greenwashing allegations. However, reclassifications have slowed down, the report notes.

About 180 funds upgraded to Article 8 from Article 6 (which have no sustainability criteria), while only six downgraded to Article 8 from Article 9.

Seven Handelsbanken Paris-aligned index funds, which were previously downgraded to Article 8 from Article 9, reverted to Article 9.

Also, in the last three months, 190 Article 8 funds updated their minimum sustainable investment allocations, according to Morningstar. Firms are more and more keen to add carbon emission-reduction objectives to their strategies. Close to 600 Article 8 and Article 9 funds now report having a carbon-reduction objective.

The majority of Article 8 funds consider at least half of the 14 SFDR ‘principle adverse impacts’ (PAI) for corporate investments, while the majority of Article 9 funds consider at least 11 of them. But less than 8% of Article 9 funds consider all 14 corporate PAIs.

PAI statements refer to the negative impacts of investments on the planet and society.

Morningstar noted that disclosures of entity-level PAI statements – which were required by June 2023 – on a comply-or-explain basis were “impossible” to compare due to differences in scope of disclosure, asset mix, data sources and methodologies, but that these statements should prove their value over time.

Hortense Bioy, global director of sustainability research at Morningstar, said Article 8 and Article 9 funds had increased their assets in the second quarter, despite the continuously challenging macro environment.

“[Asset managers] just started to disclose principal adverse impacts at entity-level. PAIs are a cornerstone of SFDR, but their implementations remain a challenge, not least because of a lack of standard data and methodologies. Investors will need to understand the limitations of these new disclosures and learn how to use them over time.”

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