Hundreds of ETFs holding €270 billion in assets under management were downgraded from Article 9 to Article 8 under the EU sustainable investment rules, according to sustainability data provider Matter.
The study revealed that 307 Article 9 funds, totalling €170 billion, were downgraded to Article 8 in Q4 of 2022 and a further €99 billion worth of funds were downgraded in January 2023.
These downgrades resulting in a reclassification to Article 8 were driven by passive strategies tracking Paris-Aligned and Climate Transition Benchmarks.
Prior to the downgrades, the sustainable fund universe grew by 65% between June and September 2021 following the inception of Sustainable Financial Disclosure Regulation (SFDR) in March 2021.
According to Matter, Article 9 ETFs are more likely to disappoint investors as they expose investors to greater levels of SDG misalignment.
Article 9 ETFs also perform worse on average on the majority of Principal Adverse Impact indicators, which show how certain investments pose sustainability risks.
The study also found that Article 8 funds were more likely to be Paris-aligned, whereas Article 9 funds were more SDG-aligned and more likely to pursue a solutions-focused approach. This is demonstrated as 18 out of 20 Article 9 funds employ a thematic approach.
In comparison, 17 out of 20 newly downgraded Article 8 funds employ a Paris-aligned approach.
As a result, Matter has urged EU regulators to acknowledge different sustainability objectives as SFDR fails to account for differences between ESG and Paris-aligned approaches.
The report stated: “Although displaying similar sustainability characteristics, this divide fails to account for the long-term difference in strategy between ESG and Paris-aligned approaches, which are currently conflated under the Article 8 classification.”
The uncertainty surrounding fund classification regulation led to a record low of sustainable fund launches in Europe in the first quarter of 2023. As a result, the European Commission has sought to reduce uncertainty by issuing ammendments to SFDR to clarify the classification of investment products as Article 8 or Article 9 funds.
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