EU ESG fund reclassification is expected to stall until 2025 after halving since its Q1 2023 peak, as the June elections delay any overhaul of the EU’s Sustainable Finance Disclosure Regulation (SFDR) rules prolonging market uncertainty.
According to a report by Bloomberg Intelligence, upgrades led 70% of Q1 moves, primarily from Article 6 to 8, adding $370 billion to the $7.4 trillion Article 8 pool, while only a few funds advanced to the dark-green Article 9.
The SFDR provides a standardised approach to ESG fund disclosures as part of the EU Sustainable Finance package. Article 9 comprises “dark green” funds with sustainable investment as a core objective. Article 8 is for “light green” funds that include both ESG and non-ESG traits without sustainability as a core goal. Article 6 funds don’t have an ESG focus but may still opt to publish a Principle Adverse Impact Statement, capturing their carbon footprint and adherence to global ESG standards.
EU ESG Ucits projected to cross €9 trillion by 2027
Adeline Diab, chief ESG strategist at Bloomberg Intelligence, noted: “Total reclassifications in Q1 were just a fraction of the peak seen last year at 439 vs. 945 in Q1 2023. Relabelling is likely to be limited until 2025 due to the EU’s review of the SFDR framework. Both upgrades and downgrades were led by active strategies, primarily from Article 6 with no ESG focus to Article 8, the light-green funds. Article 8 to 6 downgrades accounted for 60% and 20% of total fund shifts, respectively.”
The researchers found that Article 6 to 8 reclassification led to over 90% of Q1 upgrades, totalling $370 billion and adding 5% to the catch-all Article 8. Money-market funds represented about 70% of assets moving into Article 8, with around 15 upgrades led by JP Morgan and Legal & General. In contrast, only a handful of funds moved to the dark-green Article 9 category, with upgrades from Article 8 to 9 and Article 6 to 9 accounting for 7% and 2% of the recent moves, respectively.
Diab added: “Valued at $1.5 billion, the Vontobel Twentyfour Sustainable Short Term Bond Income Fund was the largest Article 8 to 9 upgrade entering the $380 billion dark-green category. This was followed by UBS Paris-Aligned Benchmark and Climate Transition Benchmark ETFs, totalling $520 million, who also entered the dark-green category.”
Total downgrades in Q1 saw $60 billion move from Article 8 to 6 and Article 9 to 8, with the former representing 60% of downgrades, according to BI. Article 8 to 6 demotions were mainly in active strategies spanning diverse asset classes, including equity, fixed income and money-market funds, led by Pictet, which downgraded the Global Multi Asset Themes Fund ($10 million).
