Europe

Fears of Article 8 Fund Greenwashing Amid Growth

Eight months after SFDR’s launch, strong inflows are accompanied by continued concerns over “catch-all” category.

Assets in SFDR Article 8 and 9 funds are continuing to grow, but a lack of minimum sustainable investment thresholds means that investors in the former face a continued risk of greenwashing, according to analysis from Morningstar.

The data provider’s Director of Sustainability Research, Hortense Bioy, presented data on the Sustainable Finance Disclosure Regulation’s (SFDR) impact on the European funds market over its first eight months, at a webinar held on Thursday.

Bioy said there has been strong growth in Article 8 and Article 9 funds throughout 2021 since the regulation was introduced. “Article 8 or Article 9 funds represent 37% of the EU funds’ assets, up to September 2021,” she said, adding that the vast majority of total assets were in in Article 8 funds. This compares to a third of European fund assets, according to Morningstar data published in July.

“Article 8 and Article 9 funds are taking a growing share of total fund inflows,” said Bioy.

SFDR Level 1, which came into effect on 10 March, asks asset managers to sort their ESG funds and other investment products which promote environmental or social characteristics into Article 8, and products with an environmental or social objective into Article 9. All other funds fall under Article 6. SFDR Level 2, which will ask asset managers to provide the underlying evidence supporting these categorisations via principal adverse impact disclosures, has been delayed by another six months until January 2023.

Funds categorised as Article 8 feature a wide range of strategies, with some reflecting stringent criteria and rigorous methodologies to minimise exposing investors to ESG risks. But other funds have been registered under Article 8 without making a significant change to their investment process.

The delays to Level 2 could mean that current trends around the use of Article 8 continue, due to the absence of clear classification guidelines. Morningstar has previously described Article 8 as a “catch-all” category.

What’s in a name?

Morningstar’s latest analysis showed that eight of the ten largest Article 8 funds do not include terms such as green, ESG or sustainable in their names, suggesting that they have been categorised by asset managers as Article 8 opportunistically, not necessarily making adjustments to justify their classification.

Article 8’s largest fund names includes AB’s American Income and Global High Yield funds and Fidelity’s Optimal Income fund.

“There isn’t actually a single fund in the top ten table of Article 8 funds that has ESG-related terms in their names that would indicate they are actively marketed by their asset managers as sustainable or ESG funds,” said Bioy. “I think this reflects some of the confusion out there and why some market observers are saying that SFDR, especially Article 8, may have given the opportunity to some asset managers to greenwash funds that were not marketed as green before, now claiming they are green, or at least greener than the funds that only comply with Article Six requirements.”

For Article 9, almost all of the top ten funds listed included words such as ‘SRI’, ‘sustainable’, ‘environmental’, or ‘clean’ in their title. These include Nordea’s Global Climate and Environment and Pictet’s Global Environment Opportunities funds.

“The story is clearly different for Article 9 funds,” she added. “The top ten Article 9 funds includes eight funds that have ESG-related terms and their names, which reflect those enabled strategies. Two exceptions are Handelsbanken index funds that have kept their names after they switched to a Paris-aligned benchmark in May this year.”

The biggest asset managers of Article 8 and Article 9 funds, in terms of market share, were: Amundi (6.2%), Nordea (4.7%), Swedbank (3.9%), JP Morgan (3.4%), BlackRock (3.2%), Fidelity (2.8%), Eurizon (2.8%), Allianz GI (2.8%), AllianceBernstein (2.5%), and Pictet, Schroders and NNIP all equal at 2.4%.

Robeco, Handelsbanken, UBS, BNP Paribas, DWS, AXA, Natixis, and Credit Suisse rounded out the top 20.

But despite concerns of potential greenwashing, the funds still performed better by most sustainability metrics, Bioy added.

Article 8 or Article 9 funds tended to have a higher Morningstar Sustainability Rating. “Most but not all Article 8 or Article 9 funds score well on carbon risks,” she said. “Article 9 funds scored best on carbon risk, with 90% achieving a negligible or low score, followed by 80% of Article 8 funds.”

Morningstar also found that active funds dominate the ESG fund landscape and were twice as likely to be classified as Article 8 or 9 compared to passive funds. “The number of Article 8 or 9 funds is highest in the equity asset class,” said Bioy, followed by the fixed income asset class.

Article 8 funds saw similar levels allocated in all categories, which mirrors other funds not focused on sustainability; however, Article 9 assets were much more weighted toward equity funds.

SFDR also appeared to spur product innovation, Bioy said, with as many as 50% of new funds being launched classified as Article 8 or 9.

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