Just as there are manifold hues of green, so too exist varied kinds of green investment funds. According to the EU Sustainable Finance Disclosure Regulation (SFDR), investment funds can be stratified under Articles 6, 8, and 9. Funds categorised under Article 6, occasionally acknowledged as “grey” funds, lack any sustainable or socially responsible investment goals. On the other hand, funds under Articles 8 and 9 are considered light and dark green respectively.
But how crucial is this variation in colour? And just how eco-friendly is green? Dr Fabiola Schneider from University College Dublin, advisor to the European Commission’s Platform on Sustainable Finance, indicates that the SFDR demands asset managers to divulge more data on the environmental risks and effects of their investment commodities available in the EU by establishing transparency guidelines. The degree of exposure depends on whether a fund identifies itself as falling under Article 6, 8, or 9.
As Schneider clarifies, both Articles 8 and 9 are deemed sustainable but have different levels of commitment. Article 9 funds have explicit sustainable investment aims, embodying more rigorous criteria, while Article 8 funds essentially ‘promote’ ecological or social features.
Gayle Bowen, the managing partner of K&L Gates’ Dublin office, states that an Article 9 fund is a readily recognisable proposition. According to her, based on the European Commission’s 2021 Q&A, they have a specific composition, ensuring all their holdings, alongside certain stances for specific purposes like hedging or liquidity, meet the sustainability expectations and pass the SFDR’s ‘do no significant harm test’.
Bowen observes that Article 8 funds, by contrast, cover a wide range concerning sustainability. The European Commission’s 2021 Q&A resulted in a substantial demotion of Article 9 funds to Article 8 funds, leading to a surge in Article 8 funds with a notable ESG focus.
Conversely, Bowen warns against those Article 8 funds that, while claiming to promote some environmental or social characteristic, may have feeble commitment to ESG. These funds are frequently labeled as ‘light green’ funds. However, their classification by itself provides no concrete proof of their eco-credentials.
A recent study conducted by MainStreet Partners, an AllFunds subsidiary specialising in ESG data, revealed startling findings that around one-fourth (24%) of funds classified as Article 8 under EU sustainability standards still pose greenwashing risks. Despite this, there’s a considerable growth in these funds. Schneider shed some light on the strong performance of both Article 8 and Article 9 funds, which saw an increase of 1.7% in Q4 2023, reaching a record-breaking total of €5.2 trillion. At present, these funds collectively dominate approximately 60% of the EU market.
Metrics such as high interest rates and economic downturns in several big economies prompted significant transformations in the fund industry over the last quarter of 2023. Schneider suggests that while Article 8 funds make up most of this 60% market segment, it’s important to emphasise its extensive diversity.
Sustainable funds have witnessed incredible popularity ever since SFDR was instituted in March 2021, with about half of the funds sanctioned by the Central Bank of Ireland in the previous year falling under the umbrella of Article 8 or Article 9. According to Bowen, although demand remains high, a slight dip has been observed in the past six months.
Bowen points out that the market’s trend aligns with his observation, as Article 9 funds experienced net outflows for the first time in the last quarter. Article 8 funds, meanwhile, started witnessing outflows a bit earlier and have seemingly picked up pace recently. The demand for such funds can be subject to variations based on country and investor location. Bowen indicates that they see more demand in the Nordics and certain EU areas than from investors in Asia, Switzerland or the US. Nonetheless, the performance of ESG integrated strategies has shown to be on par with traditional strategies.
“As the Sustainable Finance Disclosure Regulation (SFDR) progressively takes effect, greater awareness is being observed within the sector and among our clientele regarding the implications of being categorised as either an Article 9 fund or an Article 8 fund,” asserts Bowen. “While we continue to provide insights and counsel on the more intricate aspects of these regulations, basic comprehension of the fundamental principles is now prevalent.
On the other hand, when it comes to investors, particularly those of retail nature, the complexities and detailed disclosures related to SFDR may not be easily understood. The situation is exacerbated by the fact that Articles 8 and 9 have now been adopted and recognised as product labels in a move that goes against the European Commission’s original plan.
“In particular, this could lead to confusion with regards to Article 8 funds, and it’s an issue that is currently under investigation by the Commission,” Bowen adds.
It’s also crucial to remember that SFDR remains an evolving regulatory framework, with more amendments anticipated in the future, thus bringing the likelihood of further shifts in the colour charts, highlights Schenider. She reminds us that the regulation was implemented in March 2021, and it was only in December 2023 that the European Commission concluded a consultation on the operation and future of SFDR, signifying that “major alterations to the current system” might still be on the horizon.