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EU ESG Fund Market in “Full Flux” post-SFDR

EFAMA report shows differences in green fund market share across Europe as interpretation and policing varies.

A new report says delays and national divergences in the interpretation of Europe’s Sustainable Finance Disclosure Regulation (SFDR) has resulted in a varied and fluid market for ESG funds across the region.

The European Fund and Asset Management Association (EFAMA) released its latest Market Insights report titled ‘The European ESG market – Introducing the SFDR’, which breaks down the European ESG market, reviewing the assets under management of funds using the SFDR framework.

“Although it was not the regulators’ intention for SFDR Articles to be treated as product labels, the implementation has, in practice, split the EU fund universe into three categories,” the report says.

EFAMA’s report marks the first time that it has – in cooperation with national associations – collected data on SFDR Article 8 and 9 funds specifically through survey data as well as commercial data, which it says offers a better picture of the alternative investment fund (AIF) market and European funds.

SFDR Level 1 came into effect on 10 March and asks asset managers to sort their ESG funds and other investment products into Article 8 (promoting environmental or social characteristics) or 9 (having an environmental or social objective). All other funds fall under Article 6. Level 2 will ask asset managers to provide the underlying evidence supporting these categorisations in line with the EU’s Green Taxonomy.

“The coverage of funds by SFDR Articles 8 and 9 is considerably uneven across Europe,” said Thomas Tilley, Senior Economist at EFAMA, on the report’s findings. “Various factors play a role here, such as different SFDR Level 1 text interpretations by national regulators, the delayed implementation of the Level 2 measures and varying maturity levels of ESG fund markets between member states,” he added.

SFDR Level 2, which will ask asset managers to provide the underlying evidence supporting categorisations with reference to the EU’s green taxonomy, has been delayed by six months until 1 July, 2022.

“Because of the continuing uncertainty regarding the upcoming Level 2 measures, national regulators developed these rules with little information on the direction of travel of the EU framework,” the report said. “Consequently, these national guidelines have imposed different requirements for sustainable financial products, significantly reducing the comparability.”

The survey results show the market remains in “full flux” says the report and that it should, “be treated with some caution”.

“The ESG market has already undergone significant changes since the SFDR introduction and will undergo further changes in the coming months and years,” it adds.

Market differences

The report found that net assets of Article 8 funds totalled €3.7 trillion, making up 22% of the European fund market at the end of Q1 2021. The main domiciles of Article 8 funds are Luxembourg (35%), France (16%), the Netherlands (13%), Sweden (13%) and Ireland (9%). In terms of the domestic market share of Article 8 funds, Sweden took the top spot (92%), followed by Belgium (50%) and the Netherlands (48%).

Article 9 fund net assets amounted to €340 billion, or about 2% of the European fund market at the end of Q1 2021, said the report.

“As the total net assets of SFDR Article 9 funds are low, it is unsurprising that the market share of these funds at the national level is correspondingly low. SFDR Article 9 funds accounted for 0% to 4% of national domiciled funds.”

Luxembourg accounted for more than half of total Article 9 fund net assets, followed by France (16%) and the Netherlands (9%).

Equity funds accounted for 47% of all Article 8 funds and 71% of all Article 9 funds, whereas they only accounted for 30% of the total UCITS and AIF markets.

Asset managers in Europe applied an ESG investment approach to a total of €11 trillion of assets, funds, and mandates, at the end of Q1 2021. This figure is higher than the 2019 estimation of €10.7 trillion.

EFAMA said the gradual introduction of the taxonomy would create more divergence throughout next year.

“The most immediate milestone is 1 January, 2022, with the application of the Taxonomy product-level disclosures in SFDR,” it says. “Articles 5 and 6 of the taxonomy create an obligation for Article 8 products with sustainable investments and all Article 9 products to report on their level of taxonomy alignment.”

“The industry suffers from a lack of guidance on how to deal with the discrepancy between the 1 January, 2022 obligation and the delayed application of taxonomy alignment disclosures by non-financial undertakings to 2023 under the Taxonomy Article 8 Delegated Act,” it added.

The report highlighted that there were some differences in the implementation strategies of institutional versus retail investors. Institutional investors were seeing more effects of the implementation than retail investors but these were still only moderate.

“While the fund management industry still faces difficulties and uncertainties in the implementation process of the SFDR framework,” said Tilley, “[We are] confident that these challenges will fade once the regulatory framework is complete and investors have access to the necessary corporate reporting data to comply with their new obligations.”

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