Stockholm (NordSIP) – Since the launch of the EU’s Sustainable Finance Disclosures Regulation (SFDR) in March 2021, fund managers have started aligning their product disclosures with the categories defined by the regulation.
The most stringent classification of funds are known as Article 9 SFDR funds, which covers the disclosures of funds that conduct “sustainable related investments as their primary objective”. This classification is supposed to cover the most sustainable funds marketed in Europe, also often called “Dark Green”.
As the most sophisticated regulatory framework available, SFDR is the focus of regulators and legislators the world over, with even the SEC seemingly taking inspiration. Its success is crucial not just for sustainable finance in Europe, but also for the rest of the world. However, it is not always clear to market participants where the boundary between Article 9 funds and its less sustainable Article 6 and Article 8 counterparts is. This, and the self-reported nature of these classifications, has caused concerns among European Authorities. In the Netherlands, Dutch Authority for the Financial Markets (AFM) soon found that disclosures by Dutch funds about sustainability risks and sustainability characteristics is often too general. Sweden’s Finansinspektionen has surveyed and reviewed classifications and found some inconsistencies. Denmark’s regulators, Finanstilsynet, created a dedicated unit that focuses exclusively on sustainable finance. Clearly, there is room for improvement.
Clarity AI’s Article 9 Fund Research
In this spirit, sustainability tech platform Clarity AI published a new Whitepaper titled SFDR: Just How Sustainable are Article 9 Funds, which analyzed 15,000 funds, and specifically focused on 750 Article 9 funds to understand to what extent they can really be considered “sustainable investments”.
To disentangle the matter, Clarity AI suggests a three-step methodology to assessing sustainable investments focused on: contributions to a sustainable objective by assessing performance on mandatory principal adverse impact (PAI) indicators and alignment with the EU Taxonomy and the SDGs, the Do No Significant Harm (DNSH) principle and exclusions based on good governance.
Problematic Article 9 Funds
The top three findings of Clarity AI’s white paper are cause for concern. “The classification of funds according to the SFDR guidelines is increasingly used in the markets as a shorthand for communicating that a product is sustainable. However, our analysis shows that some of the Article 9 funds currently in the market might be falling short of complying with the sustainability-related criteria,” says Patricia Pina, Head of Product Research and Innovation at Clarity AI.
Of the 750 Article 9 funds reviewed by Clarity AI, research found that nearly 20% of the Article 9 funds have more than 10% of their investments in companies with violations of the UNGC principles or the OECD Guidelines for multinational enterprises – and 40% have more than 5% exposure.
Moreover, the report also finds that “nearly 10% of Article 9 funds have more than 10% exposure to fossil fuels. In total, the Article 9 funds analyzed are investing in over 1,250 companies that produce or participate in the distribution of fossil fuels. While some of these companies have a small share of their revenues coming from activities related to fossil fuels, more than 500 companies earn the majority of their revenues from these activities.”
Beyond these concerns, “38% of Article 9 funds have more than 10% of assets invested in companies with very poor performance in mandatory quantitative PAIs. While they claim to be sustainable, these funds are investing in companies that are among the 5% worst performing companies in at least one of the mandatory PAI indicators.” On equality grounds, the research also finds that 75% of the Article 9 funds invest in at least one
company with no women on the board.