Fund Solutions

German Article 8 Funds Grow by a Fifth

Number and volume of ‘dark green’ funds also begin to recover following swathe of SFDR Level 2 downgrades in Q1 last year.

A rebound in Article 8 and 9 products over past year leaves sustainable funds accounting for the majority of the German market, according to Scope Ratings.

The European fund ratings provider’s recent report noted the momentum of Article 8 funds’ growth is “slowing but remains significant”, while Article 9 fund assets registered a slight uptick following a significant number of downgrades in Q1 2023. This means the number and assets under management (AUM) of light green (Article 8) and dark green (Article 9) products had increased again so far this year.

Under the EU Sustainable Finance Disclosure Regulation (SFDR), Article 8 funds are meant to promote environmental and/or social characteristics, while Article 9 refers to products with sustainable investment objectives and which meet the standard of “do no significant harm”.

More than half (55%) of German licensed funds are now considered sustainable under Articles 8 and 9 of SFDR, as is the case for 60% of AUM.

The country has approximately 6,200 funds classified under Article 8 with €4.4 trillion (US$4.73 trillion) in AUM. According to the report, the number of Article 8 products increased by 12.4% and AUM by 22.1% in February 2024 compared to the previous year.

Meanwhile, Article 9 funds consisted of 613 products with a total volume of €224 billion. The report noted Article 9 funds had grown since the end of February 2023 but not to the same level as Article 8.

Trends in Germany have broad parallels with the wider European market. In February, analysis published by ESG and impact data provider MainStreet Partners showed a 20% year-on-year increase in the number of funds classified as Article 8 across jurisdictions, but also found that 24% of Article 8 funds could be at risk of greenwashing.

Article 9 recovery 

Scope Ratings’ research flagged that the decline in AUM of German-registered Article 9 funds evident in February 2023 had not continued into this year. In Q4 2022, expectations of stricter regulation from SFDR Level 2 – which came into force in January 2023 – led to a wave of downgrades from Article 9 to 8.

According to the new report, this February marked a slight recovery with the number of Article 9 products increasing by 8.9% and their AUM by 4.7%, meaning they account for 5% of the German market in number and 3% of AUM. “These moderate growth rates show that providers are still being cautious about labelling funds as Article 9 products and that inflows and outflows are balancing each other out,” it noted.

In January, data from Morningstar highlighted a dip in overall demand for Article 8 funds, registering a record €26.7 billion of outflows in Q4. Article 9 funds also suffered their first-ever quarterly outflows of €4.7 billion. European sustainable funds attracted just US$3.3 billion of net new money in Q4 2023, down from the revised US$11.8 billion of inflows in Q3.

According to a report from Morningstar published last May, Article 9 funds experienced their lowest inflows on record, totalling €4 billion. The data provider noted these reduced inflows were largely driven by the downgrades of more than 300 products to Article 8 from Article 9 ahead SFDR Level 2’s implementation.

Separate Morningstar analysis found the trend of downgrading funds from Article 9 to 8 had slowed by Q2 2023, but that fund managers were reluctant to reclassify funds back to Article 9. In Q4 2023, only four funds downgraded to Article 8 from Article 9 while eight were upgraded.

SFDR consultation

Last September, the European Commission issued a consultation seeking feedback on the current requirements of SFDR. The consultation also identified two possible strategies for transitioning to a more precise product categorisation system.

The first would build on and better develop the distinctions between Articles 8 and 9, while the second would introduce a product categorisation system focused on the type of investment strategy, such as transition focus or promised contributions to certain environmental objectives.

Responses to the consultation largely supported improved definitions for green funds but are split on whether to junk existing labels. Following the consultation, the Commission is set to release a report on SFDR outlining their position sometime this quarter.

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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