€270bn of Article 9 ETF funds downgraded

€270bn, Article 9, ETF, fund, ETFs, assets under management, Article 8, EU sustainable investment rules, sustainabilityHundreds of ETFs holding €270 billion in assets under management were downgraded from Article 9 to Article 8 under the EU sustainable investment rules, according to sustainability data provider Matter.

The study revealed that 307 Article 9 funds, totalling €170 billion, were downgraded to Article 8 in Q4 of 2022 and a further €99 billion worth of funds were downgraded in January 2023.

These downgrades resulting in a reclassification to Article 8 were driven by passive strategies tracking Paris-Aligned and Climate Transition Benchmarks.

Prior to the downgrades, the sustainable fund universe grew by 65% between June and September 2021 following the inception of Sustainable Financial Disclosure Regulation (SFDR) in March 2021.

According to Matter, Article 9 ETFs are more likely to disappoint investors as they expose investors to greater levels of SDG misalignment.

Article 9 ETFs also perform worse on average on the majority of Principal Adverse Impact indicators, which show how certain investments pose sustainability risks.

The study also found that Article 8 funds were more likely to be Paris-aligned, whereas Article 9 funds were more SDG-aligned and more likely to pursue a solutions-focused approach. This is demonstrated as 18 out of 20 Article 9 funds employ a thematic approach.

In comparison, 17 out of 20 newly downgraded Article 8 funds employ a Paris-aligned approach.

As a result, Matter has urged EU regulators to acknowledge different sustainability objectives as SFDR fails to account for differences between ESG and Paris-aligned approaches.

The report stated: “Although displaying similar sustainability characteristics, this divide fails to account for the long-term difference in strategy between ESG and Paris-aligned approaches, which are currently conflated under the Article 8 classification.”

The uncertainty surrounding fund classification regulation led to a record low of sustainable fund launches in Europe in the first quarter of 2023. As a result, the European Commission has sought to reduce uncertainty by issuing ammendments to SFDR to clarify the classification of investment products as Article 8 or Article 9 funds.

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