SFDR Article 6, 8 and 9 products explained. What do the classifications mean?
Written by Ben Goble
The EU has started to implement the Sustainable Finance Disclosure Regulation (SFDR), which sets out rules for classifying and reporting on sustainability and ESG factors in investments.
Forming part of the EU Financing Sustainable Growth Action Plan, SFDR was established with the following goals:
- Encourage investment in projects with a social or environmental objective
- standardise the reporting of sustainability traits, enhancing comparability between financial products
- increasing transparency of financial products with respect to sustainability
- prevent greenwashing – the act of presenting a financial product as more environmentally sound than it actually is, in an attempt to capitalise on the growing demand for these products
SFDR regulation applies to all financial market participants (FMPs) and financial advisors (FAs) in the EU, FMPs with EU shareholders, and those marketing themselves in the EU, setting out clear disclosure requirements when it comes to ESG considerations.
Since March 2021, FMPs managing funds and FAs providing advice have been required to make disclosures regarding how they integrate sustainability risks into investment decision making as well as the adverse sustainability impacts of the funds’ investments.
SFDR requires that UCITS and AIFMs must designate investment products as an Article 6, 8 or 9 fund, and make certain disclosures in-keeping with this choice. These pre-contractual disclosures are required to ensure that investors have greater transparency before entering an investment product or accepting advice.
One disclosure is a fund’s sustainability risk, which is the risk of an environmental, social or governance event that could cause an actual or a potential material negative impact on the value of the investment. Sustainability risk is required under all fund types to varying degrees.
Read on to find out the characteristics that define SFDR Article 6, 8 and 9 products and what these latest developments mean for asset managers.
What is an Article 6 product under SFDR?
Article 6 is the default classification for funds, and the one most appropriate for those with no ESG focus. This means funds that neither have a sustainable investment objective, nor do they embrace investment in assets with environmental or social benefits.
In this classification, incorporation of sustainability risks into investment decision making and the impact of sustainability risks on fund returns must be described in the fund's prospectus (AIF) or Private Placement Memorandum (PPM). Where a fund manager does not consider sustainability risk in the decision-making process, the disclosure should explain why under the principle comply or explain .
For Article 6 products there is also a requirement to publish a Principle Adverse Impact (PAI) statement or explain the choice not to. Financial market participants employing more than 500 staff are required to publish PAI statement. The PAI is a disclosure by the firm on possible harm that investment decisions may have on sustainability factors relating to environmental, social and employee matters, respect for human rights, anti‐ corruption and anti‐ bribery matters.
What are Article 8 and 9 funds under SFDR?
Unlike Article 6, Article 8 and 9 products are both considered to be sustainable, but with distinct differences. Under SFDR, funds promoted as ESG are required to classify as being either an Article 8 or 9 product, depending on whether they meet the criteria for either classification, with Article 9 products subject to the most stringent requirements. In both cases, products must also meet the Article 6 disclosure requirements.
Article 8 products
Under SFDR, Article 8 products promote investments or projects with positive environment or social characteristics and with good governance principles, alongside other non-ESG traits. Such promotion could include screening out certain environmental and socially harmful investments or considering ESG ratings when making investment decisions. If the investment product has a benchmark, the FMP must disclose whether the benchmark is consistent with the product’s promoted characteristics.
While sustainable investment is not an objective of the product, it remains an aspect of the investment process. Article 8 products need to disclose the degree (if any) to which they invest in environmentally sustainable investments or in investments with a social objective, as set out by EU Taxonomy regulations.
Article 9 products
Article 9 covers products that target a sustainable investment primary objective. A sustainable investment is an economic activity that contributes to an environmental or social objective. Products must comply with the ‘do no significant harm’ principle which means proving that the product does not in any way significantly harm any of the EU Taxonomy objectives. A benchmark index which aligns with the fund objective must also be chosen. The benchmark will then be used to measure achievement of the fund's sustainable investment objective.
What does this all mean for asset managers?
For firms that operate in the EU to be able to market investments as Article 8 or 9, they will need to review the whole lifecycle of products, from the initial product development and marketing, through to monitoring and reporting, updating policies and processes accordingly.
It is also important that firms develop processes to gather and store relevant data and information, to comply with the disclosure requirements of the respective articles.
Finally, there is a need to implement a risk management policy and framework that covers ESG and SFDR within the business, ensuring that this is updated to reflect ever-evolving sustainability reporting requirements, and that risk metrics are reviewed regularly at the fund and investment level.
For more information on complying with SFDR disclosures and general ESG data requirements, head to www.landytech.com/for-asset-managers .
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More than two years on from the launch of the EU Sustainable Finance Disclosure Regulation (SFDR), SFDR continues to drive flows and the transition of non-ESG funds towards ESG in Europe and beyond. In this report, Goldman Sachs Research analysts assess large Article 8 and 9 funds to explore how they are tackling key requirements of SFDR, including article 8 & 9 classification, sustainable investment frameworks, principal adverse impacts, do no significant harm and good governance.
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SFDR Article 8 and Article 9 Funds: Q3 2023 in Review
Since the European Union's Sustainable Finance Disclosure Regulation came into force in March 2021, asset managers have been required to provide more information on the sustainability risks and impact of their investment products sold in the EU. Amid persistent macroeconomic pressures, including high interest rates and slowdown in some of the largest economies, investors continued to pull money from Article 8 funds as these registered outflows of EUR 20.5 billion in the third quarter of 2023. Meanwhile, inflows into Article 9 products shrunk to the lowest level of subscriptions for Article 9 funds since the introduction of SFDR. This report provides an update on the landscape of Article 8 and Article 9 funds at the end of September 2023, examining aspects such as flows, assets, product launches, fund reclassifications, sustainable investment targets, and other data from the European ESG Template, or EET.
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- An overview of Article 8 and Article 9 Fund Universe
- An analysis of the funds that altered their SFDR status
- A closer look at Article 8 and Article 9 funds through the lens of the European ESG Template
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The EU Sustainable Finance Disclosure Regulation represents a new frontier for the private markets industry. We explain what the rules mean and how to navigate the challenges.
The EU’s Sustainable Finance Disclosure Regulation (SFDR) aims to make investment products more transparent by setting strict disclosure standards. The first set of SFDR requirements came into effect in March 2021. Part of a new wave of European regulation, the rules should make it easier for investors to compare sustainable funds and prevent greenwashing.
However, they also pose challenges for many investment firms, especially private funds.
The complexity of the legislation plus the difficulty of gathering the data required means a lot of uncertainty surrounds SFDR.
Here we explain what the rules mean, the products they affect, when they come into force – and what happens if you don’t comply.
What is SFDR?
The EU Sustainable Finance Disclosure Regulation imposes mandatory environment, social and governance (ESG) disclosure obligations.
It requires disclosures from investment firms on indicators of principal adverse impacts (PAIs) on sustainability factors such as greenhouse gas emissions. It also classifies funds into three categories (see below), according to how sustainable a fund is.
The pre-contractual and periodic disclosure documents that form part of SFDR were originally planned to apply from next January; were then postponed until 1 July 2022; and have now been put back to 1 January 2023.
Which funds are affected by SFDR?
SFDR applies to all financial market participants and financial advisers in the EU, as well as those based outside the EU who market products to clients inside the EU.
Investment firms, such as asset managers and pension providers, as well as qualifying venture capital and social entrepreneurship activities, all fall within SFDR’s scope. It affects products including alternative investment funds (AIFs), undertakings for the collective investment in transferable securities (UCITs) and insurance-based investments.
The PAI obligation operates on a “comply or explain” basis – unless a firm has more than 500 employees, when it becomes mandatory.
When does SFDR come into force?
The level one rules were introduced on 10 March 2021. These require financial institutions to evidence sustainability activities at an entity level.
The level two rules involve more detail and include periodic product reports. The European Commission has now stated that these – the SFDR regulatory technical standards (RTS) including the Taxonomy Articles 5 and 6 – will apply from 1 January 2023. This has been postponed from the earlier planned date of 1 July 2022.
The first disclosure of PAI reports will be due on 30 June 2023, and will cover the reference period of 1 January 2022 to 31 December 2022.
SFDR is one of ten actions of the EU’s Sustainable Finance Action Plan. Others include Taxonomy Regulation, EU Benchmark Regulation, EU Ecolabel Regulation and Corporate Sustainability Reporting Directive.
How are products classified by SFDR?
Funds are put into three categories:
- Article 6 strategies either integrate ESG considerations into the investment decision-making process or explain why sustainability risks are not relevant. But they do not meet the additional criteria of article 8 or 9.
- Article 8 (light green) strategies promote environmental and/or social characteristics and may invest in sustainable investments, but do not have sustainable investing as a core objective.
- Article 9 (dark green) strategies have a sustainable investment objective.
The difference between articles 8 and 9 is causing confusion, with some firms unsure how to label their funds.
According to the Principles for Responsible Investment (PRI) initiative – a UN-backed network of international investors – some asset managers are holding off disclosing under article 8 because there’s no clear definition of what “promote” means in this context.
On the other hand, some managers have classified a large proportion of their funds as meeting the article 8 threshold, leading to concerns about consistency with disclosures, and ultimately, greenwashing.
The European Securities and Markets Authority is preparing to issue further guidance on compliance with SFDR, to bring “greater clarity and coherence” to the rules.
It also proposes that two new SFDR product categories should be created for funds that have an environmental objective.
What are the challenges of SFDR for private equity and real estate funds?
The relevance of SFDR to illiquid assets such as real estate is indisputable. Buildings are responsible for about one-third of CO₂ emissions in the EU , according to the European Commission.
In the private equity sector, there is growing recognition that ESG factors can offer a competitive advantage: more than 500 private equity houses have signed up to PRI.
However, it is difficult for private equity funds to source ESG data from holdings, as this information is not publicly available. ESG data is required to make disclosures on websites, in prospectuses and in periodic reports, as stipulated by SFDR.
The data challenge – as well as uncertainty over the exact rules – is a problem for many of our clients. Intertrust Group’s ESG data gathering and analytics solution, developed to collect and manage ESG data for illiquid assets, can help alleviate the problem.
As well as adhering to the general rules, managers should look out for any specific to their asset class. Fourteen of the 18 mandatory sustainability-principal adverse impact indicators relate to investee companies including indicators on GHG emissions, water, biodiversity, waste, social and employee matters. Two of them relate to real estate: one is exposure to fossil fuels through real estate assets; the other measures exposure to energy-inefficient real estate assets. In addition, managers have to select at least one out of 22 voluntary environmental indicators and one out of 24 voluntary social and governance indicators.
Level two disclosures are more onerous than level one, and private equity and real estate funds should consider how to meet them from a framework, systems and data perspective.
What are the consequences for violating SFDR?
Complying with SFDR is vital for private funds to protect their reputation and attract investors who want to allocate their money sustainably.
Regulatory consequences of violations of EU financial markets regulations are implemented in national legislation in EU member states. There are basic fines, maximum fines, fines as percentage of net turnover and penalty payments (provisional fines). Depending on the nature and seriousness of the violation, there are fine categories (1, 2 and 3). For example, in the Netherlands category 2 fines can be up to €2.5m or 5% of net turnover. Category 3 fines can be up to €20m.
How Intertrust Group can help
- ESG data gathering and analytics is Intertrust Group’s first ESG product, aimed at helping private equity and real estate fund managers take control of their portfolio ESG data.
- Our comprehensive and bespoke solution can be adapted to suit client processes and software solutions. We provide managers with the necessary knowledge and support for all ESG reporting responsibilities, including meeting SFDR requirements.
- Our presence in more than 30 jurisdictions brings excellent insight into regulatory demands.
Private capital & hedge fund services.
July 26, 2023
All the Article 8 and Article 9 VC funds in Europe self.__wrap_b(":R1acpm:",0.7)
Esg isn't just a buzzword any more — it's part of european law. self.__wrap_b(":r1qcpm:",1).
Lots of VCs have spent the past few years baking environmental and social considerations into their investing. But, beyond self-declaration, there are limited ways to judge which funds are truly walking the walk.
It’s a problem that the European Union’s sustainable finance disclosure regulation (SFDR) hopes to fix. The SFDR, the first of its kind globally, mandates investors, private banks and financiers in the EU to classify their funds based on how embedded ESG is within their investments, regardless of whether or not they have a specific ESG focus.
The SFDR, which came into force in March 2021, has three categories for funds: Article 6, Article 8 and Article 9. Classifications are made on a fund-by-fund basis, meaning one VC firm can have funds under different regulations.
- Article 6 funds need to show that they are addressing sustainability risks in their investment decisions. They don’t need to actively pursue ESG investments. It’s the lowest level of disclosures and the default unless funds can prove they fulfil Article 8 or 9.
- Article 8 funds, also dubbed “light green” funds, must show that they “promote” ESG characteristics. The regulation is yet to set minimum thresholds for qualifying as an Article 8 product.
- To qualify as an Article 9 fund — or a “dark green” fund — investors must show that sustainability is an “objective” of a fund’s investments. This means they must make only sustainable investments (generally) and that managers must disclose how investments qualify as environmentally sustainable.
The EU has made a point of spelling out that Article 8 and 9 refer to the level of disclosure an investor has agreed to, rather than being ESG approval ratings.
At the start of this year, the EU implemented SFDR Level 2, upping the disclosure requirements for each category. According to Morningstar data, 300 investment products were downgraded from Article 9 to Article 8 by fund managers in anticipation of heightened reporting requirements.
What do VCs think?
Lena Thiede, partner at Planet A Ventures, which is in the midst of investing from an Article 9 fund, says the label has the potential to combat greenwashing and channel more funding into climate tech. She also says it can help VC funds to attract the right LPs.
“While the SFDR was not designed as a labelling scheme, our experience is that it is being used as one by market participants and that categorising a fund as Article 9 significantly improves chances of a successful fundraising with mission-driven LPs,” Thiede says. Planet A says it was the first VC fund in Germany to achieve Article 9 classification.
That said, Thiede points out that Article 9 is not entirely suited to investors backing early-stage companies whose emissions will by nature increase as they scale. Some Article 9 funds, those that comply with Article 9(3), must be aligned with the EU Climate Transition Benchmark or an EU Paris-Aligned benchmark — the goal set in the 2015 Paris Agreement, aiming to keep warming within 1.5C. The Paris benchmark requires companies to reduce its carbon footprint by 7% annually.
“But we want climate tech companies to scale to enable the rest of the economy to decarbonise. Key performance indicators could rather be based on potential for future impact, not historical emissions,” she says.
Critics say that much of the SFDR and its reporting requirements remain vague, leaving room open for greenwashing. Last year, Morningstar said that 23% of investment products labelled Article 8 don’t live up to ESG principles, as defined by Morningstar.
“Given that this system is still nascent, we have certainly run into some implementation issues, but we’ve always been able to resolve them,” says Anton Arts, managing partner at SET Ventures. SET is currently raising its latest fund, which will be Article 9-compliant.
“We consider the entire SFDR framework as a journey that LPs and GPs will have to navigate together in the coming years, as the regulation is further clarified, and precedents and best-practice examples emerge.”
Here’s a non-exhaustive list of Europe’s Article 8 and Article 9 funds. If we've missed your fund, email [email protected]
Article 8 funds.
- HV Capital’s latest fund, its ninth, is Article 8-approved. HV Capital is a generalist fund based in Germany. Its latest fund is worth €700m, and 30% of it will go towards climate and sustainability-focused companies.
- Speedinvest , one of Europe's most active seed-stage investors, classifies its funds as Article 8 funds.
- Early-stage investor Antler , which has offices around the world, has given all its European funds an Article 8 classification. Antler's Nordics fund is an Article 9 fund.
- The latest fund from High-Tech Gründerfonds , also based in Germany, is an Article 8 fund. The fund is the investor’s fourth.
- All three of Amsterdam-based VC Rockstart ’s funds are Article 8 funds. Rockstart invests in early-stage agrifood, energy and emerging tech startups.
- Project A , a VC firm based in Berlin, is currently investing from its fourth fund, which is an Article 8 fund. Project A invests in digital tech companies.
- Paris-based early-stage VC firm Elaia is also currently investing from i ts fourth fund, an Article 8 fund. Elaia invests in B2B startups, particularly in sectors like cybersecurity, cloud infrastructure, fintech and insurtech.
- Inven , a Czech climate tech VC, has two funds, both of which have Article 8 accreditation.
- Butterfly Ventures , a seed-stage fund focused on the Nordics, is currently investing from an Article 8 fund, targeted at a final close of €100m.
- B2venture , previously known as Btov Partners, is currently investing from an Article 8 fund. B2venture invests in digital businesses at seed and pre-seed stage.
- J12 Ventures, which is based in Stockholm and invests in early-stage companies in the Nordics and Baltics, is currently investing from an Article 8 fund.
- Wellstreet , a Swedish-based early stage VC firm is currently investing from an Article 8 fund, and raising another.
- Munich-based Possible Ventures , which invests in health, climate, energy and society, is currently raising its third fund, an Article 8 fund. Its second fund was also an Article 8 fund.
- Teampact.ventures , a Paris-based impact investor, is raising an Article 8 fund.
- Paris-based XAnge 's fourth fund is an Article 8 fund. It's a €220m fund for early-stage companies. XAngle also operates an impact fund, Mutuelles Impact, which is an Article 9 fund.
- Synthesis Capital , a London-based fund which invests across Europe, Israel and the US, is currently investing from an Article 8 fund. Synthesis invests in food tech.
- Sandwater , an Oslo-based seed and Series A stage investo, has a €100m Article 8 fund to invest in climate and health tech.
- Sofinnova Partners , a pan-European investment fund, classifies all its funds as Article 8. It also has one fund, which it invests into industrial biotechnology (agriculture, chemicals, food and materials) which is an Article 9 fund.
- ACE Swiss Tech Outliers , which invests in Swiss startups from seed to Series A, is investing from its fourth fund, worth CHF 105m, an Article 8 fund.
360 Capital, a VC based in Paris and Milan, has two funds which are Article 8 classified. 360 Capital focuses on deeptech.
- Revaia, a pan-European growth stage investor based in Paris and Berlin, has two Article 8 classified funds.
Article 9 funds
- AENU , an impact tech fund based in Berlin, is currently investing from its first fund, worth €100m , which is an Article 9 fund.
- Swedish fund Norrsken, which invests in early stage companies, has two Article 9 funds.
- Extantia, based in Berlin, is investing from an Article 9 fund at present. Extantia, which invests in decarbonisation technology, announced a €150m venture fund last year, plus a €150m fund-of-funds.
- Seaya Ventures, based in Spain, announced its latest fund, an Article 9 fund, last year. Seaya invests at Series A and beyond, focused specifically on southern Europe.
- World Fund , a Berlin-based climate tech VC, has just one fund, and it's Article 9-certified. World Fund is aiming to close €350m in total.
- Planet A Ventures , based in Berlin, closed its first fund, an Article 9 fund, in February this year. It’s got €160m to invest in climate tech .
- SET Ventures , based in the Netherlands, is currently raising its fourth fund, which will be an Article 9 fund. Its first three funds are all Article 8 funds. SET Ventures invests in software for the energy transition.
- 2150, based in London and Copenhagen, invests in solutions advancing urban sustainability from its €268m Article 9 fund.
- Malmö-based Pale Blue Dot announced a €93m second fund earlier this year which is an Article 9 fund. The firm's first fund was Article 8. Pale Blue Dot invests in early-stage climate tech companies.
- Aster , a Paris-based VC, is currently raising an Article 9 fund. Its previous funds are Article 8 funds. Aster invests in climate tech and recently acquired the entirety of TotalEnergies CVC portfolio.
- Global investor Lightrock has a climate fund, based in Europe and predominantly deployed in Europe, which is an Article 9 fund. The fund is worth €860m and tends to make Series B+ investments.
- Finnish fund Greencode Ventures , focused on climate tech Article 9 fund. The firm is targeting a €60-100m fund size. Greencode invests in early stage companies across Europe.
- Dutch fund 4impact , which invests in digital businesses focused on sustainable impact, is currently investing from its second fund, which is an Article 9 fund.
- Educapital , a French VC firm focused on edtech, has an Article 9 fund, its second fund overall.
- The European Circular Bioeconomy Fund (ECBF), which invests in solutions for a circular economy, is an Article 9 fund. The firm is based in Germany.
- Mustard Seed Maze , an impact investment VC based in Lisbon, has an Article 9 fund.
- Dutch venture builder NLC has four funds it invests from, including one Article 9 fund. The Article 9 fund is t argeting a final close of €100m , with €20m raised.
- DeeptechXL , a Dutch fund focused on early-stage deeptech solutions like quantum and advanced materials, is currently investing from an Article 9 fund.
- Oslo-based impact VC Norselab is currently fundraising for its second fund, an Article 9 fund. The firm's first fund was an Article 8 fund.
- Future Energy Ventures , the VC arm of energy firm E.ON, is currently investing from an Article 9 fund.
- Stockholm-based Summa Equity , which invests in companies from the Nordics and Northern Europe, is investing from its third fund, a €2.3bn Article 9 fund.
- ETF Partners , an impact-focused fund based in London but investing throughout Europe, is currently investing from its fourth fund, which is an Article 9 fund.
- Tilia Impact Ventures , based in the Czech Republic, has a second fund which is an Article 9 fund. Tilia is focused on impact investing through central and eastern Europe.
- Rubio Impact Ventures , an Amsterdam-based investor has two funds, both of which are Article 9 funds.
- Ananda Impact Ventures , a fund based in Munich which invests across Europe, has a €108m Article 9 fund as its latest fund.
- Astanor Ventures , based in Belgium and investing in food and agriculture innovation, has an Article 9 fund.
- Spain's Axon Partners Group , an asset management firm which backs startups, has an Article 9 fund as well as an Article 8 fund.
- Serena , based in Paris, has an Article 9 fund worth €85m which is invests into tech health tech, climate tech and edtech.
- London-based Hambro Perks , an investment firm, is currently raising a fund which will be classed as Article 9 when it makes invests in the European Union. Hambro Perks is aiming to raise £200m to back companies focused on water, waste and energy at Series C level and beyond.
- Una Terra , a Zurich-based fund, is currently investing from its first fund, which is an Article 9 fund.
Freya Pratty is a senior reporter at Sifted. She covers climate tech, writes our weekly Climate Tech newsletter and works on investigations. Follow her on X and LinkedIn
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SFDR Blog Series: Article 8 vs Article 9 Classification
Published: 3 Aug 2022 · Last updated: 15 Oct 2023
The primary aim of the Sustainable Finance Disclosure Regulation ( SFDR ) is to tackle greenwashing in the financial sector. As part of this mandate, the regulation requires fund managers to classify their funds based on their sustainability performance. The three classifications are Article 6, 8, and 9 funds. We outline the differences between these fund types in the first article of our SFDR blog series . Today’s article explores these differences with a focus on Article 8 and Article 9, in light of recent legislative clarification. SFDR Level 1, implemented in March 2021, required fund managers to classify their existing funds according to Articles 6, 8, or 9. Level 2 of this regulation is due to be enforced from January 1st 2023. It requires managers to disclose detailed information to reinforce these initial classifications. The first draft of the Level 2 requirements, known as the Regulatory Technical Standards ( RTS ), was originally published in early 2021. Since this initial publication, there have been a number of redrafts. Q&As have also been published by the European Commission (EC), clarifying technical details with regard to the implementation of Level 2 regulations. Part of the supplementary information provided pertains to the requirements for Article 8 and 9 fund classification. These requirements, until recently, have been unclear. In this blog, we outline the key takeaways from these recent publications. We provide fund managers with a clear understanding of the requirements for Article 8 and 9 classifications. We also introduce the concept of Article 8+ funds. Before we dive into these requirements, there are two elements of SFDR that are worth emphasising.
The two crucial elements of SFDR
Firstly, whilst this blog focuses on fund-level disclosures and the associated asset-level disclosures, there are other firmwide disclosures required for SFDR compliance. Please refer to this earlier blog in our series for further detail. Secondly, it is important to note that there are still minimum disclosure requirements associated with being classified as an Article 6 fund. This blog, however, focuses on the additional disclosures required for Article 8 and Article 9 classification. Funds are automatically classified under Article 6, unless proven otherwise by the fund manager. The remainder of the blog is structured as follows: firstly, disclosures specific to Article 8, 8+, and 9 funds are outlined. Secondly, disclosures common to all of these funds are then summarised. This should not be treated as a comprehensive list for compliance purposes. It aims to cover the key disclosure areas for fund managers in a succinct manner.
Article 8 funds: the promotion of environmental and/or social characteristics.
As suggested by its definition, disclosures for Article 8 classification centre around the environmental/social characteristics promoted by the fund. These details must be provided in pre-contractual and periodic documentation. Characteristics can be expressed in the form of investment policies, goals, or targets. The fund manager must select the particular fund characteristics and provide detail on how these are attained. Sustainability indicators must therefore be defined, in order to measure these characteristics. The EC recommends the use of relevant principal adverse impact indicators ( PAIs ) to act as sustainability indicators. For more information on the PAIs, head to our previous blog on 'Introducing the Principal Adverse Impacts ( PAIs )' and download the Full List of PAIs we have put together. PAIs provide objective, comparable measures that can be tracked over the lifetime of the portfolio. These protocols are also easy to implement, as they are already required for other SFDR disclosures. When defining an Article 8 fund, the use of the term “promotion” can be widely interpreted. In 2021, the EC clarified that promotion can encompass claims, information, reports, disclosures, or even impressions that portfolio assets consider the prescribed environmental/social characteristics. The Commission goes on to list a wide range of document types in which these “impressions” could be stated. (Click here for the full list). The range of possible disclosures has become a cause for confusion for fund managers. For example, one suggested format for promoting environmental/social characteristics is an exclusion policy relevant to these characteristics. This could involve the exclusion of coal-generated power, for instance. However, it is unclear how the PAIs can track progress towards this “characteristic”.
Article 8+ funds: The promotion of environmental and/or social characteristics with a minimum commitment to making sustainable investments
There has been a general market consensus that Article 8 classification requirements in their current form are not sufficiently stringent. This has led to a wide range of financial products, all self-classified under Article 8. These range from funds with minimal exclusion policies to funds defining their investment strategy according to environmental or social concerns. In response to this, the concept of Article 8+ funds was developed by the financial sector, rather than the regulators. Article 8+ funds (or mid-green funds) differ from Article 8 funds (or light-green funds) in that a proportion of the portfolio must be classified under “sustainable investments”, as defined by the SFDR. There are the three key requirements for this type of investment:
- Contribution to an environmental or social objective.
- Compliance with the “do no significant harm” principle (for which disclosure of the PAI indicators is required).
- Adherence to “good governance” (discussed later).
For Article 8+ funds, a classification process must be embedded into pre-contractual and periodic disclosures to determine whether or not portfolio assets classify as sustainable investments under SFDR regulation. Fortunately, there is significant overlap between sustainable investment classification and alignment with the EU Taxonomy. Given the detailed technical screening criteria available to assess Taxonomy alignment (discussed in a previous blog in the SFDR series), the process of classifying an investment as sustainable is made easier if the activity falls within the Taxonomy.
Article 9 funds: The objective of the fund is sustainable investment
Now that the distinctions between Article 8 and 8+ funds have been outlined, it is relatively easy to establish the requirements for Article 9 fund classification. As discussed, Article 8+ funds differentiate themselves from Article 8 funds by containing a proportion of “sustainable investments” in their portfolio. Article 9 funds take this one step further by requiring that all assets be sustainable investments (with certain exceptions related to hedging or liquidity). As such, additional disclosures that are required for Article 9 classification take a similar form to Article 8+ disclosures, with the additional requirement that investments are exclusively classified as sustainable.
Disclosures required for all Article 8, Article 8+, and Article 9 classifications
Though there will be some variation between Articles 8 and 9, the information that must be published on the fund manager’s website is similar for both fund types. Both in terms of content and format. Website disclosures overlap with the pre-contractual disclosures described above, as well as further detail regarding data management and due diligence processes.
Consideration of the PAIs
All funds regulated under SFDR must detail, in both periodic and pre-contractual documentation, how the principal adverse impacts on sustainability factors are considered. Beyond an explanatory disclosure, fund managers are encouraged to use quantifications in the form of the PAI indicators. Technically, consideration of the PAIs is a firm-wide disclosure. However, in May 2022, the EC clarified that the PAI indicators could be applied to individual financial products, without the requirement for firm-wide compliance.
Both Article 8 and 9 funds require disclosures detailing fund composition, presented in the form of investment proportions. This is intended to provide investors with a clear understanding of the fund’s profile. Article 8 classification requires the disclosure of the proportion of investments aligned with its promoted characteristics, and both Article 8+ and Article 9 classifications require the disclosure of the proportion of investments aligned with environmental/social objectives, as well as Taxonomy alignment.
Good governance practices
A final requirement for both Article 8 and 9 classification is the implementation of a screening policy to ensure that all portfolio companies practice good governance. It is worth emphasising that this does not apply to other asset classes, such as real estate assets. The RTS states that this policy should broadly cover sound management structures, employee relations, remuneration, and tax, but this is not further defined. Once again, this leaves this requirement largely open to the interpretation of fund managers. We recommend that policies are drafted with the portfolio companies in mind to ensure relevancy. Possible starting points for drafting this policy can be found in the OECD Guidelines for Multinational Enterprises .
It is worth noting that only Article 8+ and 9 funds can use the term “sustainable” in the fund name. Similarly, the terms “impact” and “impact investing” should only be used by funds that intend to generate measurable and positive social/environmental impact.
As further SFDR clarification is provided, and as ESG measurement regulations continue to evolve, every asset manager must take action to adapt to these changes. Managers and investment decision makers that fail to integrate these new rules in their business plan risk failing to meet European - or even global - standards. ESG management is an emerging topic, and governing bodies are responding to calls for further clarification. We review and report on every new update in the field to help market participants better understand sustainable finance. Follow our SFDR blog series to find out more. Contact us for more information on how our intuitive software can further streamline regulatory adherence.
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How have fund managers been interpreting the Article 8 label under SFDR?
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It’s been six months since the European Union set phase one of its Sustainable Finance Disclosure Rules (SFDR) in motion, requiring fund groups to divulge information about their investments’ environmental, social and governance (ESG) risks as well as impact on society and the planet for the first time.
The ambitious piece of regulation is designed to provide fund selectors and investors with greater clarity about where their money is going by highlighting funds that “promote environmental or societal characteristics,” Article 8, and those that have “a sustainable objective,” Article 9. Funds that do neither are classed as Article 6.
At the 20-day mark Morningstar found after examining half the 5,695 Luxembourg-domiciled funds, 21% had been classified as Article 8 or 9, or 25% of total European fund assets. Four months later, when it had examined around 82% of funds in the market, Article 8 and 9 funds made up nearly a quarter of the market.
In terms of assets, funds falling under the EU’s new ESG taxonomy account for a third of the fund market, or €3trn (£2.58trn), and Morningstar estimates that could hit 50% in the next 12 months as products are launched and existing strategies are upgraded.
Legal & General Investment Management and Allianz Global Investors told Portfolio Adviser that around half of their European-domiciled Ucits funds have been classified as Article 8 or 9 funds to date.
JP Morgan Asset Management and Fidelity International also had over half of their European ranges in the Article 8 or light green category but no funds in the stricter Article 9 or dark green category.
Alliance Bernstein said 90% of its European fund range had been moved into the Article 8 category or around $90.3bn. Dark green Article 9 funds represented just $4bn assets or 4% of funds.
Schroders said in its H1 results it was looking to have most of its assets in its main continental fund range managed within either Article 8 or 9 funds under the EU’s SFDR later this year.
A slippery slope
Compared with Article 9, Morningstar says Article 8 appears to be a “catch-all category”, home to a wide variety of asset classes with very different approaches to ESG.
Of the top 20 largest Article 8 funds, only one – Vontobel mtx Sustainable Emerging Markets Leaders – had any ESG or related terms in its name “that would indicate they are actively marketed by their asset managers as ESG or sustainable”, the research house notes.
Many asset managers justify their funds’ Article 8 badges on the basis ESG factors are “integrated” into the investment process. But this is often poorly defined and buried beneath hundreds of pages of legal fund documentation.
As ESG factors are not baked into the investment objective this means funds can still buy and hold securities regardless of their environmental or social impact, which may catch certain investors off-guard.
Clarity on what this ESG integration process involves is critical. DWS is currently under investigation by German and US regulators after its former head of global sustainability Desiree Fixler claimed it overstated how much it used sustainable investment criteria to manage assets.
Joshua Kendall, head of responsible investment at Insight Investment, says fund groups’ variety of interpretations will not necessarily result in so-called greenwashing.
However, he adds: “Article 8 status is weakened by the proliferation of strategies that can be aligned with it, some of which bolt elements of ESG onto their approach rather than having ESG risk analysis as a core part of the methodology.”
See also: Fund buyers wary as number of funds repurposed as ESG continues to rise
How are fund managers interpreting the Article 8 classification?
AllianceBernstein’s €21.1bn American Income Fund and the €17.5bn Global High Yield, the largest active Article 8 funds currently, claim to integrate ESG factors “into all aspects of the investment-making process” and “extensive engagement” with corporate issuers and governments.
A spokesperson says AllianceBernstein’s framework for applying and retaining Article 8 classification is “in line with many of our peers” and based on a minimum proportion of net assets that promote environmental and social characteristics while seeking to achieve their investment objective.
“As we refine our SFDR framework for Article 8 funds, additional environmental, social and governance-related thresholds may be imposed, pending regulatory approval,” they add.
The €12.6bn Pictet Global Megatrend Selection Fund applies an exclusionary approach by not directly investing in issuers that are deemed “incompatible” with Pictet Asset Management’s approach to responsible investment and “may engage” with companies to promote positive ESG practices, according to its factsheet.
A look at Pictet’s Responsible Investment Policy shows it treats “ESG integrated” strategies, which can buy and hold securities of issuers with “high sustainability risks and/or principal adverse impacts”, as Article 6 funds.
The Article 8 moniker is reserved for strategies that have stricter exclusion policies, including those with a positive tilt – a bias toward companies with low sustainability risks – and a best-in-class approach – seeking out issuers with low sustainability risks and avoiding those that pose a high ESG risk.
The Allianz China A-Shares Fund, another multi-billion-euro active Article 8 strategy, puts the emphasis on engagement “specifically with heavy carbon emitters in order to promote climate consciousness”, its factsheet states.
It is overweight materials and industrials relative to the benchmark and includes petrochemical maker Wanhua Chemical among its top holdings, which has a severe ESG risk, according to Sustainalytics.
“As we don’t have impact goals or measurements – we use our ESG criteria and have determined China A fits under Article 8,” a spokesperson says.
JP Morgan Asset Management and Fidelity International told Portfolio Adviser for a fund to be classified as Article 8 it must hold at least 50% of net assets in companies with good environmental or social characteristics. The €11bn JP Morgan Emerging Markets Fund and Fidelity’s €9.2bn Global Dividend Fund both have a five-globe sustainability rating from Morningstar, while the €12.9bn Fidelity Global Tech Fund has four globes.
When exclusion is not enough
While active managers tend to employ exclusions on top of other approaches like ESG integration or engagement, Morningstar notes many index funds rely on exclusions only. Critics question whether such exclusions go far enough to justify the SFDR labels.
The L&G UK Equity Ucits ETF is touted as an Article 8 fund on the basis it tracks the Solactive Core UK Large & Mid Cap Index, which excludes coal miners, companies that make controversial weapons such as cluster weapons or antipersonnel mines, or those that have breached at least one of the UN Global Compact (UNGC) principles for three consecutive years.
But its top 10 holdings are identical to the L&G funds tracking the FTSE 100 that do not have the Article 8 badge and include ‘sinful’ stocks such as British American Tobacco, miner Rio Tinto and oil giants BP and Royal Dutch Shell.
SCM Direct co-founder Alan Miller feels it’s a stretch to say it promotes ESG characteristics.
“We are not aware of a single UK plc with 30% or more of their revenues from coal mining, a single UK plc controversial weapon company or a single UK plc that has breached the UNGC principles three years running, so its exclusions are in practice meaningless.”
It’s a similar story with other passive products applying basic exclusions. The iShares MSCI Europe ESG-Screened ETF also weeds out UNGC violators, as well as thermal coal companies, tobacco firms and controversial weapons and nuclear weapons makers.
However, these types of businesses represent a small fraction of the MSCI Europe Index. Tobacco companies account for 0.89%, while civilian firearms make up 0.44%, nuclear weapons 0.65%, thermal coal 0.42% and UNGC breachers 2.1%.
“All stakeholders need to act with integrity, honesty and transparency in terms of ESG offerings to consumers looking to do good as well as receive good returns,” explains Miller.
“Unfortunately, it appears that companies have no ethics or integrity and are essentially ‘gaming’ the system by making very marginal tweaks to existing products and investments to allow them to classify funds as being Article 8 funds, when in practise they have at best marginal differences to a non-Article 8 fund.”
An LGIM spokesperson says funds are classified as Article 8 if the promotion of environmental or societal characteristics is “a binding element” of the investment selection process.
They add that across the industry index managers have marked funds that are deemed ‘exclusions-only’ as SFDR 8. “This is often as a result of consultation processes organised by various index providers with their asset management clients.”
Article 8 will seem like a lower threshold a year from now
With so many different interpretations of SFDR classifications, particularly Article 8, is this helping investors to make more informed choices?
According to EQ Investors senior sustainability specialist Louisiana Salge, in terms of improving transparency the regulation has been successful so far.
“The aim of the regulation package is not just to classify funds. In fact, they aim to classify funds as a means to then request different types of disclosures about their ESG policies, processes and outcomes,” Salge says.
“This should improve the information available to the fund selector. It also aims to force all fund managers to think about how their process relates to ESG outcomes, and to formalise thinking.
“There is naturally going to be more nuance in sustainable investment approaches than three categories, so searching by classification would and should have never been enough information to judge the suitability of a strategy to a portfolio objective or client preference,” she adds.
Troy head of responsible investment and senior fund manager Hugo Ure says as ESG advances through the industry and becomes ‘mainstream’ Article 8 “is going to seem like a lower threshold in a year’s time than it does today”.
The FCA is currently toying with the idea of requiring fund groups to disclose their climate change risks in line with the Task Force for Climate-related Financial Disclosures. Asset managers who implemented this and applied it to their funds would meet many of the Article 8 requirements, Ure notes.
See also: Asset managers’ net zero pledge not enough to combat climate risks
Should the UK adopt its own SFDR?
As it stands, the UK does not have any standardised ESG disclosure regime, a situation Miller believes must be urgently rectified given the “exponential growth in ESG and greenwashing”.
“There needs to be much stricter classifications rather than marginal tilts that in practice make very little difference whatsoever to a product’s fundamental ESG credentials,” he says.
“The UK regulator talks about greenwashing but until it names and shames companies and products that it feels mislead the public, the industry will continue to unashamedly allow funds to be marketed as ESG funds with nominal ESG credentials since the current rules allow almost anything.”
Kendall adds that ideally a UK ESG disclosure regime would be aligned with the existing EU framework and “reflect the complexities of asset management”.
He says: “Oversimplifying sustainability factors across asset classes, particularly in a diverse asset class like fixed income, is a potential problem that must be avoided.”
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SFDR: What is article 6, 8 & 9? (2023)
The EU’s Sustainable Finance Disclosure Regulation (SFDR) requires asset managers to classify their funds as either an article 6, 8 or 9 fund depending on their level of sustainability –but w hat does this mean, exactly?
In this blog, we have gathered everything you need to know about articles 6, 8 and 9. What articles are you affected by? How do you comply? And what is needed for a fund to be classified ESG? Let’s have a look:
What is the SFDR?
SFDR is a part of the EU’s Financing Sustainable Growth Action Plan and was established to reorientate capital flow towards sustainable finance. SFDR requires asset managers and other financial market participants to provide transparency on sustainability and imposes mandatory ESG disclosure obligations.
SFDR article 6, 8 & 9: Disclosure requirements
The SFDR sets out mandatory ESG disclosures requirements for asset managers to comply with. The aim is to create more transparency into their investment strategies and prevent greenwashing and claims that products are sustainable when they are in reality not.
According to the SFDR’s classification system, a fund will either be classified as an article 6,8 or 9 fund –depending on their characteristics and level of sustainability:
Article 6: Funds without a sustainability scope
Article 8: Funds that promote environmental or social characteristics (light green)
Article 9: Funds that have sustainable investment as their objective (dark green)
In essence, article 6 requires asset managers to disclose the integration of sustainability risks in their funds– regardless if the fund is promoted as ESG or not. Investments promoted as ESG, however, are required to classify as being either an article 8 or 9 fund, depending on which classification requirements their financial products meet. Many are referring to article 8 funds as “light green” and article 9 as “dark green” since the requirements are higher to be labeled an article 9 fund. Just to make it extra crisp, let’s dive even deeper into what the different articles imply and what you have to do to meet the requirements.
What is SFDR article 6?
Article 6: Transparency of the integration of sustainability risks requires the following:
“Financial market participants shall include descriptions of the following in pre-contractual disclosures:
The manner in which sustainability risks are integrated into their investment decisions; and
The results of the assessment of the likely impacts of sustainability risks on the returns of the financial products they make available.
Where financial market participants deem sustainability risks not to be relevant, the descriptions referred to in the first subparagraph shall include a clear and concise explanation of the reasons therefore.”
This means that provisions for the above disclosures must be included already in the fund’s prospectus. If sustainability risks are considered to be relevant for a fund, assets managers are required to:
Declare that they have integrated sustainability risks into the investments decisions;
Develop a process to assess and identify the most significant risks
Have a disclosure policy in place that mitigate and acts on risks;
Describe how it will be achieved and track the implementation and results
And remember, funds don’t have to be classified as ESG or Green for this article to apply, and if a fund deems sustainability risks not to be relevant, it must clearly be stated and rationalized according to the article.
What is SFDR article 8?
For a fund to comply with article 8: Transparency of the promotion of environmental or social characteristics in pre‐contractual disclosures requires the following:
“Where a financial product promotes, among other characteristics, environmental or social characteristics, or a combination of those characteristics, provided that the companies in which the investments are made follow good governance practices, the information to be disclosed pursuant to article 6 shall include the following:
Information on how those characteristics are met;
If an index has been designated as a reference benchmark, information on whether and how this index is consistent with those characteristics.”
Financial market participants shall include in the information to be disclosed pursuant to article 6(1) and (3) an indication of where the methodology used for the calculation of the index referred to in paragraph 1 of this article is to be found.
So, article 8 applies to funds promoting environmental and social objectives and which take more into account than just sustainability risks as required by article 6.
However, article 8 funds don’t have ESG objectives or core objectives – as required for becoming labeled an article 9 fund.
What is SFDR article 9?
For a fund to comply with article 9: Transparency of sustainable investments in pre‐contractual disclosures requires the following:
“Where a financial product has sustainable investment as its objective and an index has been designated as a reference benchmark, the information to be disclosed pursuant to article 6 shall be accompanied by the following:
- Information on how the designated index is aligned with that objective;
- An explanation as to why and how the designated index aligned with that objective differs from a broad market index.”
Compared to article 8 funds, which should promote environmental or social characteristics and have good governance practices, article 9 funds should make a positive impact on society or the environment through sustainable investment and have a non-financial objective at the core of their offering. Both article 8 and article 9 funds will be considered ESG aligned, only that the latter one is for even further forerunners in sustainability, hence the light green and dark green reference.
How the EU Taxonomy links to SFDR
The EU Taxonomy is a classification system for environmentally sustainable economic activities and is integrated into the SFDR – specifically article 8 or 9 as these cover environmentally and or socially sustainable investments.
For both articles, a fund needs to disclose information about the proportion of Taxonomy alignment. Alignment should be expressed as percentage in turnover, capex and opex and also separated per transitional and enabling activities.
Integrate your ESG risk analysis in Worldfavor
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Download our guide Align and report on SFDR with Worldfavor and learn about how the SFDR process works and the benefits of using a sustainability platform to complete your report.
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What is SFDR, EU’s sustainable finance disclosure regulation?
What is Article 8 and 9 SFDR? ›
These are: Article 9 funds: those funds that specifically have sustainable goals as their objective (for example investing in companies whose goal it is to reduce carbon emissions). Article 8 funds: those funds that promote E or S characteristics but do not have them as the overarching objective.
What is an Article 6 product under SFDR? Article 6 is the default classification for funds, and the one most appropriate for those with no ESG focus. This means funds that neither have a sustainable investment objective, nor do they embrace investment in assets with environmental or social benefits .
An Article 9 Fund under SFDR is defined as “ a Fund that has sustainable investment as its objective or a reduction in carbon emissions as its objective .” There are a number of different requirements for Funds that promote a sustainable investment objective.
An Article 8 Fund under SFDR is defined as “a Fund which promotes, among other characteristics, environmental or social characteristics, or a combination of those characteristics, provided that the companies in which the investments are made follow good governance practices.”
Article 8 products promote environmental or social characteristics in the pursuit of other financial objectives. Article 9 products seek to make a positive impact on society or the environment through sustainable investment and have a non-financial objective at the core of their offering.
There were 6,862 funds classified as Art. 8 and 898 as Art. 9 as of the end of March. Flows into the most sustainability-focused funds also materialized despite strong outperformance from energy stocks, an industry that may be under-represented in many 'green' funds.
Article 6 covers funds which do not integrate any kind of sustainability into the investment process and could include stocks currently excluded by ESG funds such as tobacco companies or thermal coal producers.
SFDR product classifications fall under 3 categories: Article 8, Article 9 and 'Other . ' Article 8 and Article 9 products consider sustainability in a binding way. In addition, Article 8 products promote social and or environmental characteristics and Article 9 products have a sustainable objective.
The SFDR applies to financial market participants and financial advisors within the EU . This includes asset managers, institutional investors, insurance companies, and pension funds, among others.
The EU Taxonomy is the fundamental cornerstone of a suite of regulation to be launched by the EU to improve and standardise sustainability reporting. In particular, the Taxonomy will support the Sustainable Finance Disclosure Regulation (SFDR) and the upcoming Corporate Sustainability Reporting Directive (CSRD) .
What is a dark green fund? ›
Article 9 (Dark Green) Fund – A fund with sustainable investment as its sole objective . Sustainable investment under the SFDR is defined as an investment that: Contributes to an environmental objective in assisting that objective. Contributes to tackling inequality or social conflict/issues.
Principal Adverse Impacts (PAIs) – Negative, material, or potentially material effects on sustainability factors that result from, worsen, or are directly related to investment choices or advice performed by a legal entity. Examples include GHG emissions and carbon footprint.
In March 2021, the European Union's Sustainable Finance Disclosure Regulation (SFDR) came into force. The SFDR is designed to help institutional asset owners and retail clients understand, compare, and monitor the sustainability characteristics of investment funds by standardizing sustainability disclosures.
Light Green Fund statement: “ This financial product promotes environmental or social characteristics, but does not have as its objective a sustainable investment .” No significant harm to the sustainable investment objective.
ESG stands for environmental, social and governance . These are called pillars in ESG frameworks and represent the 3 main topic areas that companies are expected to report in. The goal of ESG is to capture all the non-financial risks and opportunities inherent to a company's day to day activities.
Article 9 protects your right to freedom of thought, belief and religion . It includes the right to change your religion or beliefs at any time. You also have the right to put your thoughts and beliefs into action.
ESG Investing (also known as “socially responsible investing,” “impact investing,” and “sustainable investing”) refers to investing which prioritizes optimal environmental, social, and governance (ESG) factors or outcomes .
Environmental, social, and governance (ESG) investing refers to a set of standards for a company's behavior used by socially conscious investors to screen potential investments . Environmental criteria consider how a company safeguards the environment, including corporate policies addressing climate change, for example.
UCITS stands for Undertakings for the Collective Investment in Transferable Securities. This refers to a regulatory framework that allows for the sale of cross-Europe mutual funds . UCITS funds are perceived as safe and well-regulated investments and are popular among many investors looking to invest across Europe.
Sustainability risk in the SFDR is defined as: “An environmental, social, or governance event, or condition that, if it occurs, could cause an actual or a potential material negative impact on the value of the investment arising from an adverse sustainability impact.”
What are pre contractual disclosures? ›
Pre-contractual disclosure means the sharing of material information about the franchise opportunity prior to the formalisation of the legal relationship . Its purpose is to ensure that the sales process is grounded in fact and that the parties can make a sober and objective assessment of the commercial opportunity.
While the SFDR does not make it compulsory to provide training to employees on the new disclosure regime , it is inevitable that relevant persons (for example, client-facing financial advisers and senior managers with ultimate responsibility for compliance with the SFDR) will require, and should be provided with, ...
The Sustainable Finance Disclosure Regulation (SFDR) is an EU initiative that requires financial market participants operating in the EU, to disclose the various sustainability risks associated with their investments and products, as well as to disclose their policies relating to these risks.
The Sustainable Finance Disclosure Regulation (SFDR) is a European regulation introduced to improve transparency in the market for sustainable investment products, to prevent greenwashing and to increase transparency around sustainability claims made by financial market participants.
No. SFDR does not apply to a non-EU AIFM which sells funds in the EU in response to reverse enquiry only.
SFDR Level 1 requires financial institutions within the EU—or those marketing to EU investors —to make principles-based disclosures on ESG-related activity. Firms must report not only on the sectors they invest in, but also on their portfolio companies. Further, SFDR disclosures are not limited to marketing materials.
Product-level disclosure Under the SFDR, financial market participants and financial advisers are required to disclose product information related to sustainability for both environmental, social, and governance (ESG)-related products and non-ESG products.
Hence, for investors NFRD is mostly relevant because it stipulates how investee companies report ESG data. SFDR, by contrast, most concerns financial market actors and ensures transparency about how these report on sustainability risks to their audiences (e.g., retail investors).
The EU taxonomy is a classification system, establishing a list of environmentally sustainable economic activities . It could play an important role helping the EU scale up sustainable investment and implement the European green deal.
Aligned activity/Alignment: an eligible economic activity that is making a substantial contribution to at least one of the climate and environmental objectives, while also doing no significant harm to the remaining objectives and meeting minimum standards on human rights and labour standards.
Are green funds green? ›
Green funds are mutual funds or other types of investment vehicles that promote socially and environmentally conscious policies and business practices . Green funds might invest in companies engaged in green transportation, alternative energy, and sustainable living.
The Principal Adverse Sustainability Indicators (“PASI”) detailed in the SFDR include a range of mandatory and voluntary indicators that FMPs are either required or may choose to report. In order to comply with the PASI requirements, FMPs will need to obtain ESG footprint data from their investee companies.
Green financing is to increase level of financial flows (from banking, micro-credit, insurance and investment) from the public, private and not-for-profit sectors to sustainable development priorities .
- GHG emissions (Scope 1, 2, 3 and total)
- Carbon footprint.
- GHG intensity of investee companies.
- Exposure to companies active in the fossil fuel sector.
- Share of non-renewable energy consumption and production.
- Energy consumption intensity per high impact climate sector.
The Principal Adverse Impacts, or PAIs, are measured by an assortment of 14 mandatory corporate indicators, with two additional indicators for sovereigns and two real-estate specific indicators .
Principal Adverse Impact (PAI) is a key concept in the EU's Sustainable Finance Disclosure Regulation (SFDR) , one of the EU Action Plan on Sustainable Finance's landmark regulations.
SFDR is the first regulation set by the EU which aims to reorientate capital flow towards sustainable finance. SFDR is inserted to provide transparency on sustainability within the financial market and thereby prevent greenwashing.
The EU Taxonomy aims to provide clarity to investors and protection against “greenwashing” . Once companies begin disclosing their alignment with the technical screening criteria, it will provide detailed information on the actual environmental impact and sustainable performance of economic activities.
- Environmental – this has to do with an organisation's impact on the planet.
- Social – this has to do with the impact an organisation has on people, including staff and customers and the community.
- Governance – this has to do with how an organisation is governed. Is it governed transparently?
The principles of sustainability are the foundations of what this concept represents. Therefore, sustainability is made up of three pillars: the economy, society, and the environment . These principles are also informally used as profit, people and planet.
What is ESG in simple words? ›
Environmental, social and governance (ESG) is a term used to represent an organization's corporate financial interests that focus mainly on sustainable and ethical impacts . Capital markets use ESG to evaluate organizations and determine future financial performance.
Spurious-free dynamic range (SFDR) is the strength ratio of the fundamental signal to the strongest spurious signal in the output. It is also defined as a measure used to specify analog-to-digital and digital-to-analog converters (ADCs and DACs, respectively) and radio receivers.
SFDR is a new regulation requiring financial service providers and owners of financial products to assess and disclose environmental, social, and governance (ESG) considerations publicly .
The meaning of SFDR General use of DB, expressed as: SFDR=Ps-Pn , SFDR is the spurious-free dynamic range ( dB ), Ps is a useful signal power ( dBm ), Pn is the largest clutter signal power value ( dBm ).
Basically, sustainability in a business context encompasses these three dimensions: Environmental, Social and Governance . In other words, it is the framework for responsible, corporate action that reconciles social and environmental concerns in business operations.
The SFDR applies in full if your business meets the following categories: Financial market participant or financial advisor . Based in the EU . 500+ employees .
As it relates to ESG, and specifically to climate change and its effects, double materiality examines the potential impact of climate change on the financial health and outlook of a company . As an illustration, consider warming temperatures and rising sea levels and what these mean for the oil and gas industry.
What is environmental, social and governance (ESG)? Environmental, social and governance (ESG) is a term used to represent an organization's corporate financial interests that focus mainly on sustainable and ethical impacts. Capital markets use ESG to evaluate organizations and determine future financial performance.
What is EU Sfdr regulation? ›
In its 2021 Impact Report, Tesla said that “current ESG evaluation methodologies” are “fundamentally flawed” because it lacks focus on the company's “real-world impact” on society and the environment .
ESG is based on standards set by lawmakers, investors, and ESG reporting organizations (e.g., GRI, TCFD, MSCI), whereas sustainability standards — while also set by standards groups like GHG Protocol — are more science-based and standardized.
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SFDR articles 6, 8, and 9: what you need to know
Get ready to take your sustainable investing to the next level!
The Sustainable Finance Disclosure Regulation (SFDR) , established by the European Union (EU) in March 2021, is revolutionising the financial sector via robust and comprehensive guidelines for effective transparency and accountability.
The regulation requires asset managers, investment firms, and other financial market participants (FMPs) to disclose environmental, social, and governance (ESG) characteristics of their investment products. It is empowering investors with reliable data and transparency to support and check any claims of sustainable investment.
The SFDR defines different disclosure requirements for the FMPs as per how each fund labels itself.
The fund could adhere to these requirements based on one of the three categories defined in the regulation, specifically Articles 6, 8, and 9.
Additionally, FMPs started labelling themselves as Article 6, 8, or 9 to communicate their sustainable investment policies within the SFDR's purview.
Whether you're new to sustainable investing or a seasoned pro, understanding the differences between these articles is crucial to making informed investment decisions.
By the end of this guide, you'll have the tools to easily navigate SFDR and invest sustainably with confidence. Let's dive in!
SFDR Article 6
Article 6 defines what needs to be disclosed by funds that have no sustainability focus.
It includes funds that do not prioritise sustainability in their investment strategy, i.e. it may include companies excluded from ESG funds, such as tobacco and thermal coal producers.
While these funds are allowed to be offered in the EU, they must be explicitly labelled as non-sustainable and transparently disclose that they do not consider ESG factors.
The scope of Article 6 is vast, covering all types of investment funds, including UCITS (Undertakings for Collective Investment in Transferable Securities) and AIFs (Alternative Investment Funds).
Essentially, Article 6 requires asset managers to disclose sustainability risks and their integration into funds.
Requirements for compliance
As per Article 6 of SFDR, the transparency of the integration of sustainability risks requires:
- FMPs to include descriptions of the following components in their pre-contractual disclosures:
- How sustainability risks are incorporated into their investment choices.
- Results of assessments of probable impacts of sustainability risks on financial products’ returns.
- If FMPs consider sustainability risks as irrelevant, they must provide a succinct and clear explanation for this decision. This should be published in a separate section titled ‘no consideration of sustainable impacts’.
- If FMPs consider sustainability risks relevant, asset managers must:
- State that they've incorporated these risks into their investment decisions.
- Develop a process for the assessment and identification of the most significant risks.
- Have a disclosure policy in place for mitigation and resolution of risks.
- Outline the approach for achievement and monitor outcomes and execution.
Documents needed for disclosure policy as per Article 6
Once it has been ascertained whether sustainability risks are relevant or not, the fund manager and the fund need to consider how to document their disclosure policy as per the Article.
This disclosure policy ought to encompass:
- An outline of the assessment process the fund manager employs to discern and rank sustainable elements pertinent to the fund.
- The date of approval of the policies by the board of the fund or the fund manager.
- The distribution of duties for enacting the policies within the organisation's structure and processes.
- An explanation of the methods used to choose and pinpoint sustainability markers and evaluate the effects of these indicators.
- A clarification regarding any potential inaccuracies inherent in those methods.
- An overview of the utilised data sources.
- Information on data acquired directly from invested entities or via third-party data suppliers.
Each fund should maintain a written record of the disclosure policy, which the fund’s board of directors should review and endorse on a yearly basis.
What are the implications for these Article 6 funds?
Article 6 funds, which do not have a sustainability focus, may face challenges due to the growing popularity of sustainable funds.
A study by MSCI found that integrating ESG factors often leads to better risk-adjusted returns over the long term.
As a result, non-sustainable funds may struggle to attract investors who prioritise sustainability and may underperform in comparison to sustainable funds.
SFDR Article 8: Light green funds
SFDR Article 8 products, also known as light green products, promote investments or projects with positive environmental or social qualities, or a combination of such characteristics, as long as the investments are made in enterprises that adhere to sound governance practices.
To determine whether a financial product meets the criteria of Article 8, financial market participants must use a variety of criteria, such as the United Nations' Sustainable Development Goals and the OECD Guidelines for Multinational Enterprises, in addition to conducting their own due diligence.
One example of a light green fund that complies with Article 8 is the BlackRock Sustainable Euro Bond Fund.
The fund invests in Euro-denominated fixed-income securities that promote sustainable development and adhere to good governance practices.
The fund provides pre-contractual and periodic disclosures that explain how it meets the requirements of Article 8, including information on how it selects its investments and how it evaluates their sustainability impact .
For a fund to comply with Article 8, focusing on the transparency of the promotion of environmental or social characteristics in pre-contractual disclosures, it requires:
- Information on how environmental or social characteristics are met.
- Information on reference benchmarks, if an index has been specified, and how this index aligns with environmental and social attributes.
- A reference to where one can find the methodology for calculating the index.
In essence, Article 8 pertains to funds promoting environmental and social objectives, going beyond merely considering sustainability risks. However, these funds do not have ESG objectives as core objectives - which makes them different from Article 9 funds.
For Article 8 funds, regulatory template standards are used for disclosure in pre-contractual documents. For the latter, the fund needs to include a statement with necessary documents explaining the following:
- Whether the fund intends to make any sustainable investments.
- The fund’s promotion of environmental or social characteristics, if it does not have sustainable investment as its objective.
- The details of any index that has been designated as a reference benchmark.
- How a reference benchmark is aligned with the environmental and social characteristics promoted by the product.
- Types of environmental and social characteristics promoted by the fund.
- Fund’s investment strategy and how it is going to meet its binding Article 8 criteria.
- The asset allocation plan for the fund in terms of ESG versus non-ESG products.
- A summary of whether the fund acknowledges principal adverse sustainability indicators (PASIs) as its Article 8 feature.
- Link to website product disclosures.
The fund's prospectus should clearly state that it promotes environmental or social qualities or a combination of such characteristics. The annual report of the fund should provide details about the investments made during the reporting period, including the fund’s adverse sustainability impacts, and explain how the investments align with the objectives of Article 8.
Benefits and limitations of Light Green funds
As per the European Parliament, light green funds can provide investors with an opportunity to invest in ESG initiatives while generating financial returns.
However, some light green funds may not provide the same level of impact as dark green funds or Article 9 funds, which specifically target sustainable investments.
So, while light green funds can be a step in the right direction for sustainable investing, investors may need to carefully consider the specific ESG initiatives promoted by these funds to ensure they align with their own values and goals.
SFDR Article 9: Dark green funds
Article 9 outlines the disclosure requirements for funds with distinct sustainability objectives, where majority of the portfolio consists of ESG-focused investments.
These funds are often called ‘dark green’.
The scope of Article 9 is broad, covering all types of financial products, including UCITS (Undertakings for Collective Investment in Transferable Securities) and AIFs (Alternative Investment Funds), that meet the requirements of sustainable investment goals and reference benchmarks.
One example of a dark green fund is the Allianz Global Investors' Global Sustainable Equity Fund, which aims to generate long-term capital growth while investing in companies that promote sustainability.
The fund defines its sustainable investment goal as investing in companies that support the UN Sustainable Development Goals and the Paris Climate Agreement.
Its reference benchmark is the MSCI All Country World Index, and it provides pre-contractual and periodic disclosures that explain how it meets the requirements of Article 9.
For a fund to comply with Article 9 of SFDR it requires the following:
- Where a financial product has sustainable investment as its objective and an index has been designated as a reference benchmark, the information to be disclosed shall be accompanied by:
- Information on how the designated index aligned with that objective.
- An explanation as to why and how the designated index aligned with that objective differs from a broad market index.
- Funds should contribute positively to either society or the environment via sustainable investments, with a primary focus on non-financial goals.
To comply with Article 9, product-level pre-contractual disclosures should include a summary statement with different documents on:
- The sustainable investment objective pursued by the fund.
- The fund's investment approach, in alignment with its Article 9 objective.
- The anticipated allocation of assets within the fund and across sustainable and non-sustainable investments.
- A statement that the fund considers PASIs.
- How the reference benchmarks correlate with the fund’s sustainability investment goal.
- How the chosen index's alignment with this goal varies from a general market index.
- Link to website fund disclosures.
- Article 9(3) funds, targeting carbon emission reductions, must provide information on the Paris Climate Agreement-compliant benchmarks employed by the product. If these benchmarks are unavailable, they should disclose their primary evaluation methods.
- Article 9(3) funds should aim for reduced carbon emission exposure to align with the long-term climate action goals established within the Paris Climate Agreement.
For product-level website disclosures, the following documents are needed apart from a summary:
- Explanation of how the fund’s investments pose no significant harm to the fund’s sustainable investment objective.
- Sustainable investment objective of the fund and its monitoring.
- Investment strategy pursued, including the strategy pursued to meet sustainable investment objectives.
- Allocation of investments for sustainable and non-sustainable assets.
- Methodologies used to assess and monitor the realisation of sustainable investment goal.
- Data sources and processing.
- Constraints related to the methodology and data.
- Due diligence conducted for underlying assets.
- Engagement policies.
- Achievement of sustainable investment goal by leveraging any reference benchmarks.
For Article 9 funds, product-level periodic disclosures are done via annual reports. These disclosures shall include documents highlighting:
- The degree to which the fund achieved its sustainability investment goal during the reference period.
- The fund's leading investments.
- The ratio of sustainable to non-sustainable investments.
- Measures implemented to achieve the sustainability investment goal during the specified timeframe.
- For a fund aligned with a reference benchmark, a brief overview of the product's performance in relation to that benchmark.
- For a fund focused on reducing carbon emissions as its sustainability goal, a brief overview of its alignment with the Paris Climate Agreement's objectives.
Benefits and limitations of Dark green funds
As per the European Parliament, dark green funds can offer investors the opportunity to invest in initiatives that have a significant positive impact on the environment or society while generating financial returns.
However, these funds may have higher management fees than other financial products, and their performance may be influenced by the performance of a small number of companies or sectors.
Nevertheless, if you are looking for a way to make a positive impact on the world while still generating returns, dark green funds are worth consideration.
Comparison and differences between SFDR Articles 6, 8, and 9
SFDR Articles 6, 8, and 9 aim to promote sustainable finance by increasing transparency and disclosure requirements for financial products.
Here are the key similarities and differences between the three articles:
The SFDR aims to increase transparency and standardisation in sustainable finance by requiring financial market participants to disclose the sustainability characteristics of their products.
It's crucial to understand the key differences between Article 6, 8, and 9, and their respective requirements for non-sustainable, light green, and dark green funds.
Navigating SFDR requirements may seem challenging, but with Apiday, you have the right tools and expertise at your disposal!
Our comprehensive ESG data management and reporting platform, coupled with our team of ESG experts, ensures a smooth compliance journey.
We streamline data collection and reporting, guaranteeing SFDR disclosure requirements are met.
Gain confidence in navigating SFDR with us and take a step closer to achieving your sustainable investment goals with ease!
It's important to meet SFDR requirements to not risk any non-compliance penalties!
Our SFDR Compliance feature streamlines the data collection and analysis process to help you comply with the regulation. You can reduce the time and effort required to comply with SFDR, minimise regulatory risks, and enhance your reputation as a sustainable firm. Let us help you take the hassle out of SFDR compliance, try our tool today!
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Some €2.5trn in European fund assets is estimated to sit under these categories with the number set to grow
Asset managers are being cautious in their approach to classifying their funds as Article 8 or 9 under new EU legislation Sustainable Finance Disclosures Regulation (SFDR), but already some €2.5trn in European fund assets is estimated to sit under these categories and the number is expected to grow over the coming months.
Level 1 SFDR, which came into force on 10 March, requires asset managers to publish both pre-contractual statements (e.g. in a fund’s prospectus) and disclosure statements on their websites about which of their products fall into three distinct categories. These are:
- Article 9 funds: those funds that specifically have sustainable goals as their objective (for example investing in companies whose goal it is to reduce carbon emissions).
- Article 8 funds: those funds that promote E or S characteristics but do not have them as the overarching objective.
- Article 6 funds: funds that are not promoted as having ESG factors or objectives.
Research from Morningstar in the report SFDR – The First 20 Days , which has collected SFDR data on close to 50% of funds (i.e. 5,695) domiciled in Luxembourg, Europe’s largest funds domicile, said preliminary data from 30 asset managers found funds classified as Article 8 and 9 currently represent up to 21% of total European funds and up to 25% of total European fund assets.
See also: – SFDR may deter the greenwashers but will it be the source of more confusion?
This means the current European ESG and sustainable fund market, based on SFDR definitions, could therefore be worth as much as €2.5trn.
Below is the current lists of Article 8 and 9 funds on offer from asset managers surveyed:
The report noted: “Following the first classification exercise, we found that French managers Amundi and BNP Paribas offer some of the largest ranges of investment products classified as Article 8 or 9, with 529 and 310 funds, respectively. Other managers have chosen to classify far fewer funds as Article 8 or 9. It is the case even for firms of similar size or bigger, such as BlackRock, which has 103 classified products. UBS and JP Morgan have classified 54 and 10 of their funds as Article 8 or 9 products.”
However, the report noted asset managers have taken different approaches in their interpretation of the rules and some have been more cautious for fear of having to downgrade funds later.
Therefore, Morningstar said it expects the numbers of funds being categorised as Article 8 and 9 will grow in the coming months as asset managers reclassify funds, enhance existing strategies and launch new ones that meet the requirements.
Hortense Bioy (pictured), global director of sustainability research at Morningstar and editorial panellist for ESG Clarity , commented: “It is clear from the asset managers we spoke to, of various nationalities and sizes, that it is essential for them to have as many funds as possible classified as Article 8 or 9 under SFDR . They see compliance with at least Article 8 requirements as an opportunity to demonstrate their commitment to sustainable investing. Morningstar will continue to watch this space closely and develop the tools that investors need to navigate through it.”
Scope of assets
Morningstar’s report noted that when the figures were looked at through the lens of absolute number of funds in Article 8 or 9 as a percentage of total assets, the picture looked quite different:
Nordic and Dutch asset managers feature among those with the highest proportion of fund assets in Article 8 and 9.
“This is hardly surprising given the long history and commitment to responsible investing of institutional investors in Northern European countries,” the report said. “For example, Robeco has classified 96% of its fund assets as Article 8 or 9, while KLP and SEB have 95% and 82% of their fund assets, respectively, in the two categories. Sustainability-focused boutique Mirova has positioned its full range of funds (25) in the Article 9 category.”
See also: – SFDR will highlight the asset managers serious about ESG
Meanwhile, Amundi and BNP Paribas, the two largest providers of Article 8 and 9 products in the sample, classified 60% and 80% of their existing fund ranges as such, respectively, while large asset managers, including BlackRock , UBS, and JP Morgan, exhibit much lower ratios at 17%, 11%, and 1.5%, respectively.
“Many of the surveyed managers, however, made it clear that this was just the first classification exercise and that they plan to bring additional funds into the Article 8 and 9 categories in the coming months,” the report noted.
It highlighted Amundi is aiming to get 75% of its total fund assets categorised under Article 8 and 9 by the end of the year, and JP Morgan “has opted for a prudent approach where only our existing sustainable funds will be classified as Article 8 or Article 9”, the group said in a client presentation.
Others, including DWS, UBS, Schroders , and Aviva, have shared similar plans.
Natalie is editor in chief at MA Financial covering ESG Clarity, Portfolio Adviser and International Adviser. She was previously global head of ESG insight for ESG Clarity and has been an investment journalist... More by Natalie Kenway
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SFDR 2.0 – A time for evolution
By Ian Conlon; Niamh O’Shea; Richard O’Donoghue, Maples Group
Published: 20 November 2023
On 14 September 2023, the European Commission launched a public and targeted consultation on the implementation of Sustainable Finance Disclosure Regulation (SFDR) (the Consultation). The Consultation seeks to assess the SFDR framework (identifying any potential shortcomings) whilst also focusing on the usability of the regulation and its ability to play its part in tackling greenwashing.
The Consultation is ambitious and wide ranging, and seeks feedback on the costs, disclosure and data associated with SFDR compliance as well as how SFDR interacts with other sustainable finance legislation. But perhaps what is of most interest is the Consultation’s questions in respect of the development of “a more precise product categorisation system”.
The European Commission acknowledges in the Consultation that SFDR is already operating as a de facto product labelling regime. Specifically, the Consultation asks for respondents’ view on the statement that “SFDR is not used as a disclosure framework as intended, but as a labelling and marketing tool” . Rather than seeking to re-focus SFDR as a disclosure regulation, the European Commission has proposed two possible approaches in the Consultation for repurposing SFDR 2.0 as a product regime.
The first approach put forward is to “build on and develop the distinction between Articles 8 and 9” and the existing concepts embedded in them (such as environmental/social characteristics, sustainable investments and do no significant harm), complemented by additional minimum sustainability criteria that more clearly define the products falling within the scope of each Article.
The second approach is to establish a new product categorisation system based on the product’s investment strategy. The Consultation has proposed four sustainability product categories, namely:
- Products investing in assets that specifically strive to offer targeted, measurable solutions to a sustainability related problem;
- Products aiming to meet credible sustainability standards or adhering to a specific sustainability-related theme;
- Products that exclude activities and/or investees involved in activities with negative effects on people and/or the planet; and
- Products with a transition focus aiming to bring measurable improvements to the sustainability profile of the assets they invest in.
Firstly, it must be recognised that publication of the Consultation is timely and represents a positive step by the European Commission.
The challenges presented by the phased implementation of SFDR have been well documented. So the opportunity for industry to provide feedback to the European Commission, particularly so soon after its full implementation, is extremely welcome. Looking at the two approaches proposed in the Consultation, we would be supportive of the first approach - to build upon and enhance the existing SFDR framework, as opposed to potentially starting again with entirely new sustainability product categories. We would contend that, rightly or wrongly, the ship has sailed on SFDR being purely a disclosure regulation. In reality, it is being used as a de facto labelling regime. Industry (at both the market participant and investor level) has adopted the three categories of sustainability funds identified within SFDR as product labels. The concept of an Article 6 fund, an Article 8 fund and an Article 9 fund have all now entered into the asset management lexicon. There is growing understanding of the basic distinctions between each of these categories. We would also contend that, in addition to SFDR no longer being a simple disclosure regulation, the way in which it is being implemented by EU regulators (in particular, the oversight role of the depositary) has seen it already transform into a quasi-product regime.
SFDR remains in its infancy and is still evolving. However, as we observed in our SFDR Impact Analysis , SFDR has already had a significant positive impact on the European funds space. Assets in European sustainable focused funds have exceeded €5 trillion. Over 40% of all new funds established in the European Union are seeking categorisation as either Article 8 or Article 9 funds. Even at this early stage, all signs suggest that SFDR is indeed contributing towards the objectives of the European Green Deal to reorientate private capital towards the transition to a climate-neutral, green and inclusive European economy. It would perhaps be a step backwards if the categories of Article 8 or Article 9 funds were, as the Consultation phrases it, to “disappear altogether from the transparency framework” . Rather, we believe that the European Commission should embrace how SFDR has developed to date, and focus its efforts on the areas which need enhancement or further clarity.
We would also be supportive of the Commission building on the distinctions between Article 8 and Article 9 funds. We believe that introducing minimum sustainability criteria will be key, not only from distinguishing between Article 8 and Article 9 funds, but also between Article 6 and 8 funds.
SFDR currently does not apply any minimum sustainability criteria or thresholds for what constitutes an Article 8 fund. As a result, the Article 8 category has become quite a broad church. We have seen plenty of what could be described as strong Article 6 funds demonstrating more ESG credentials than a weak Article 8 fund. The theme of Article 8 funds currently capturing wide-ranging and varying degrees of sustainability is a theme echoed in the feedback and guidance being issued by regulators across Europe in recent months. Regulators have warned that the Article 8 category should not in and of itself be relied upon as reflecting distinct levels of sustainability, and that managers should therefore not be using SFDR categorisations as sustainability labels. Regulators have similarly queried whether such an approach meets the spirit of SFDR. Introducing minimum sustainability criteria would address these issues. Establishing a baseline of what constitutes an Article 8 fund would also provide investors with more certainty about its ESG credentials, whilst also affording them the reassurance to compare Article 8 funds with greater certainty.
Looking at the second approach proposed, while encouraging the creation of these types of products is laudable, it would be our view that these types of products are already being established as either Article 8 or Article 9 funds in the existing SFDR framework. Removing the existing Article 8 and Article 9 categories entirely, and replacing them with the proposed four new types, would likely lead to another lengthy implementation period for the industry. In turn, this would potentially entail significant new implementation costs being borne by asset managers, the funds and most importantly, investors. The Consultation acknowledges (and is seeking to further examine) the impact that SFDR compliance has had on both initial and recurring annual costs. It would therefore seem at odds with that view if SFDR 2.0 was to be an entirely repurposed regime.
In examining how the existing Article 8 and 9 categories can be enhanced, the Consultation is asking the right questions. Evolving SFDR and the Article 8 and 9 categories would allow managers to build on its success to date, while also embracing its evolution into a product regime through more precise categorisation criteria.
The Consultation remains open until 15 December 2023 but the European Commission has not yet committed to a timeline for subsequent reforms. Managers should take comfort that any substantial changes to SFDR or the introduction of a new categorisation regime will take a number of years before entering into force.
Learn more about the Maples Group’s ESG Advisory Group .
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- Market & Industry Insight
by Detlef Glow .
Observing the monthly flows into the European ETF industry, one might get the impression that the majority of the money is flowing to a limited number of ETF promoters and on the next level only to a limited number of ETFs. As a result, only a limited number of ETFs should show significant growth in assets under management. If this thesis were true, the market share of the ETFs with high assets under management would increase more and more over time, up to a point where these ETFs would dominate the entire European ETF industry. On the other hand, the European ETF industry is very innovative and widens its product offerings on a permanent basis, enabling existing clients and new investors to participate in new asset classes and rising trends in the markets, which should lead to inflows into these new ETFs and the European ETF industry as a whole.
Graph 1: Number of ETFs with more than €1.0 bn in assets under management (December 31, 2015 – October 31, 2023)
Source: LSEG Lipper
Graph 1 shows the number of ETFs with more than €1.0 billion in assets under management has significantly increased since 2015. This increase can be explained by the rising popularity of ETFs launched during this period. The core asset classes such as equity U.S., equity global, equity Europe, equity emerging markets global, or U.S. government bond have profited the most from this trend (The trend toward bond products is rather new, and it is not surprising that there were only two bond classifications within the 10 largest Lipper Global Classifications at the end of October 2023). This is because these asset classes normally comprise a large share of the portfolios of all kinds of investors. Within these asset classes, funds that already had high assets under management have profited the most since these products have enough capacity for institutional investors and, because of their size, high liquidity with low trading spreads.
But beside these established ETFs, there are also a number of newly launched products that have been able to gather more than €1.0 billion in assets under management. This has driven the overall number of ETFs with more than €1.0 billion in assets under management from 106 (December 31, 2015) up to 311 (October 31, 2023). Compared to the overall number of ETFs registered for sales in Europe the market share of these products grew from 7.14% (31.12.15) to 16.11% at the end of October 2023.
More important in helping measure the concentration within the European ETF industry is a view of the assets under management. Therefore, an analysis of the market share of the ETFs with more than €1.0 billion in assets under management is warranted. As of December 31, 2015, there were 106 funds with more than €1.0 billion in assets under management. These ETFs held a total of €261.0 billion in assets under management. This amount equaled 59.18% of the overall assets in the European ETF industry (€440.9 billion). As the number of ETFs with more than €1.0 billion in assets under management increased from 106 to 311 at the end of October 2023, it is not surprising that the overall assets under management held by these products increased to €1,056.8 billion.
Graph 2: Market share of the overall assets under management (in euros) of ETFs with more than €1.0 billion in assets under management vs. all other ETFs in the European ETF industry
As shown by graph 2, the market share of the ETFs with more than €1.0 billion in assets under management grew from 59.18% at the end of December 2015 to 77.85% at the end of October 2023. These numbers show that the European ETF industry is dominated by a relatively small number of ETFs. Nevertheless, these numbers also show that the European ETF industry is still competitive since the number of ETFs with more than €1.0 billion in assets under management is increasing over time. This means that even newly launched ETFs have the chance to gather a significant number of assets under management. That said, a view of the overall trends around assets under management by Lipper global classifications shows it is more likely to gather significant assets for ETFs with an investment objective that fits into the core segment of the portfolios of the investors.
Such a market concentration can be seen as a threat to overall competition in the industry and should therefore be seen as critical. But since the assets under management, especially in the equity segment, are also dependent on movements in the underlying markets and the general trends played by investors, the assets under management in single ETFs are subject to change. In addition, ETFs are very transparent, and ETF investors seem to be very cautious with regard to the tracking quality of the ETFs they use in their portfolios. This means investors would not accept underperformance of an ETF over a medium time horizon and would switch to a higher-quality product if it were available. This investor behavior keeps the quality high, since the competition and therefore the number of products is, especially in the core asset classes, very high. The same is somewhat true regarding management fees and the TER, as shown by the latest cost reduction for the S&P 500 ETFs by State Street (SPDR). This move showcased that the European ETF industry is aware of the cost sensitivity of European investors.
Last but not least, the increasing number of ETFs in Europe shows that ETF promoters want to keep up the competition and generate new flows into the ETF market by offering new products. Even if the industry is quite concentrated, some of these new products will be able to become “blockbuster” products themselves. Time will tell whether all these new products are really needed and necessary, but for the time being there is quite lively competition between European ETF promoters.
This article is for information purposes only and does not constitute any investment advice.
The views expressed are the views of the author, not necessarily those of LSEG Lipper or LSEG.
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Blackstone to shut multi-strategy fund after assets fall 90%
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Blackstone is to close a fund that offers investors exposure to a range of hedge funds and other trading strategies, after assets fell nearly 90 per cent in four years amid lacklustre returns.
The US alternative asset manager has told investors it will wind down the Blackstone Diversified Multi-Strategy fund by the end of the year, the group told the Financial Times.
The so-called Ucits fund is governed by EU rules that make it easier for non-specialist investors to buy. Multi-strategy Ucits funds such as this are in part an attempt by managers to capitalise on the success of giant hedge funds such as Citadel and Millennium, which employ teams of traders across a wide range of strategies and which were among the biggest hedge fund winners from the coronavirus pandemic.
The fund’s closure, which has not previously been reported, demonstrates how hard it can be to capture and package that success for a wide audience.
“I haven’t seen a multi-strat in Ucits format do well. Performance has not been good,” said Patrick Ghali, managing partner at Sussex Partners, which advises clients on fund investments.
Assets in the Blackstone fund, which allocates money to managers trading areas such as equities and credit, fell from £1.7bn at the end of December 2019 to £192mn on October 27 this year, according to data compiled by research firm Kepler Absolute Hedge.
From the start of 2020 to the end of last month, the fund has lost about 2 per cent in performance terms, according to investor documents. By comparison, hedge funds on average have gained roughly 21 per cent, according to data group HFR, while the MSCI World index of stocks has gained about 17 per cent in capital return terms.
The fall in assets under management partly reflects heavy investor outflows from the wider sector. Total assets in so-called multi-strategy mutual funds that are governed by Ucits rules have dropped 30 per cent in a year to £8.8bn, according to Kepler.
Demand for ways to capitalise on the success of large, multi-strategy hedge funds has come as Citadel became the most successful hedge fund firm of all time after making a record $16bn profit for investors last year. Multi-strategy funds in this space are designed to give clients exposure to the best traders across different firms while also spreading out risk.
But returns on Ucits versions of such funds are at times drab because of the constraints of regulations that govern how the funds invest and the access given to investors. For example, the rules dictate investors must be able to buy and sell their investments in the fund on a regular basis — with many such funds offering daily trading — while no single asset can take up more than 10 per cent of the fund’s assets under management. Direct short selling, which is used regularly by hedge funds, is banned, and there are limits on leverage and the amount of illiquid assets held by funds.
Blackstone’s fund invests with managers including New York-based Two Sigma, one of the world’s biggest quantitative hedge fund firms, Florida-based credit manager Bayview and London-based emerging markets manager Emso.
It also puts money with a number of managers in which Blackstone has a financial interest. These include Hong Kong-based Seiga Asset Management, Magnetar Asset Management and subsidiaries Blackstone Real Estate Special Situations Advisors and BX LCS.
Blackstone also directly runs a portion of the fund designed to hedge risk. The fund makes up less than 0.5 per cent of the group’s hedge fund solutions business.
Blackstone said: “This is a small, legacy fund. We are in talks with clients to move their capital to newer strategies that offer greater flexibility than the current structure allows.”
Other funds similar to Blackstone’s have also suffered falls in assets, including the Neuberger Berman Uncorrelated Strategies Fund, which has seen assets drop by £957mn in the 12 months to September 2023, and Franklin K2 Alternative Strategies, which has seen assets more than halve in the same period, according to Kepler.
Neuberger Berman and Franklin Templeton declined to comment.
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