Down and Up in SFDR-land

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    Stockholm (NordSIP) – The end of last year saw a flurry of activity among asset managers proactively reclassifying their sustainable funds from Article 9 to the less onerous Article 8 category in anticipation of a stricter Level 2 of the European Union’s Sustainable Finance Disclosure Regulation (SFDR). According to Morningstar data, some 40% of funds were shifted from Article 9 to Article 8 just in the final three months of 2022, and the trend persevered for a couple of months into the new year as well.

    Dubbed the ‘great reclassification’, this mass downgrade was prompted by a lack of clarity surrounding the definitions, accompanied by worries about incoming thresholds for what should count as sustainable investments. Funds tracking Paris-Aligned Benchmark (PAB) or Climate Transition Benchmark (CTB) indices, for instance, were deemed unlikely to meet the 100% sustainable investment requirements outlined under Level 2 of SFDR. Coupled with the authorities’ intensified battle against greenwashing, many asset managers chose to be extra careful and reclassify their products preemptively.

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    Trend reversal underway

    This all changed in mid-April, when the European Commission published answers to some of the pressing questions posed by the three European Supervisory Authorities (ESAs) in an attempt to interpret and clarify the more obscure parts of the legislation. Perhaps the most important takeaway from the comprehensive Q&A document is that SFDR “does not prescribe a single methodology to account for sustainable investments”.

    Allaying many asset managers’ fears, the Commission also explicitly states that “under Article 9 of SFDR, products tracking PAB or CTB, often based on portfolios of shares or bonds of companies, are deemed to make sustainable investments.”

    Following this clarification, the sense of relief in the asset management industry has been palpable. Consequently, the fund classification trend seems to be reversing rapidly. Several of the fund companies that downgraded their funds at the end of last year have already indicated that they are planning to reinstate those funds’ Article 9 status based on the latest guidance by the authorities.

    Will the Nordics follow suit?

    Storebrand was one of the Nordic asset managers to downgrade a few of their Article 9 funds at the end of last year. At the same time, they were careful to point out that the decision was not motivated by diminished ambitions with regard to sustainability. NordSIP reached out to them for a comment of the latest developments.

    “We welcome the clarification from the EU, and like many other industry colleagues, we are now reviewing our funds,” reveals Kristian Håkansson, Product Manager at Storebrand Fonder. “Our index-aware funds still aim to reduce carbon footprint in accordance with article 9.3 and also have significantly higher ambitions than, for example, the Paris-Aligned Benchmark Index.”

    Håkansson confirms that no change has been made to the investment strategies. “Now we just want to make a well-founded decision that is in line with how EU’s response should be interpreted so that we too can contribute to uniformity and transparency that makes it easier for customers.”

    Handelsbanken Fonder is another Nordic actor considering to act on the recent regulatory clarification. It seems only a matter of time before their recently downgraded Paris-aligned benchmark funds are reclassified as Article 9, according to CEO Magdalena Wahlqvist Alveskog (as quoted by AM Watch).

    What is at stake?

    Despite the apparent enthusiasm of asset managers, there are also those critical of the latest development. In a research paper published on 1 May, ESG consultancy and data provider Matter argues that the upgrading movement risks diluting the meaningful differentiation in sustainability that was beginning to emerge with the introduction of SFDR Level 2.

    Based on the analysis of 60 of the largest sustainable ETFs, Matter could confirm that there was a solid reason to downgrade some broadly defined Article 9 funds. “The ETFs that were downgraded from Article 9 to 8 have strikingly similar sustainability characteristics to the largest ETFs that were already Article 8 labelled,” conclude the report’s authors. They issue a warning that the recent trend reversal “not only undermines consistency and comparability for investors but also exposes the classification to the same risks of greenwashing it has faced in the past.”

    All the more reason for financial actors to monitor carefully and, if possible, participate in the ongoing broad review of SFDR by the European Commission. For instance, responding to the recently announced consultation by the three European Supervisory Authorities (ESAs) could be a way to engage. This is a crucial opportunity to finetune the sustainable finance framework and steer it towards more clarity.

    Image courtesy of Pasi Mämmelä from Pixabay
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