Article 8 Funds Leaking Assets

    Stockholm (NordSIP) – As the debate over the effectiveness of the European Union’s (EU) Sustainable Finance Disclosure Regulation (SFDR) continues, research platform Morningstar has published its latest quarterly review of the state of the market for Article 8 and 9 funds.  This examination of open-end and exchange-traded funds within the scope of the SFDR was based on disclosures collected from prospectuses from 97.6% of such funds being offered for sale within the EU.

    While Article 6 funds continued to attract new money, the overall picture for Article 8 and 9 products during the 3-month period to end-September 2023 is relatively negative.  The latter benefited from inflows of EUR 1.4 billion, but this is the lowest quarterly number since the introduction of the SFDR.  The situation is even worse for Article 8 funds, which suffered withdrawals totalling EUR 20.5 billion.  The worst affected products were those that had no explicit minimum commitment to holding sustainable investments.  The divestment trend was likely influenced by a macroeconomic environment of rising interest rates and a slowdown experienced by several major economies, but it remained that Article 8 funds’ performance was in stark contrast to Article 6 products, which brought in EUR 17.8 billion during the same quarter.

    Stand-out Nordic providers

    Nordic fund managers featured relatively well in the best-selling Article 8 and 9 funds during the third quarter of 2023.  The Nordea Invest Engros Korte Obligationer topped the Article 8 charts and Handelsbanken’s Norden Index Criteria was second in the Article 9 ranking just behind Wellington’s Global Stewards Fund.  Sweden’s Handelsbanken narrowly pipped Pictet to the top spot in the ranking of asset managers by size of their Article 9 fund assets.  Nordea and Danske Invest are also in the Top 20.  Total Article 8 and 9 fund assets shrank by 1.3% over the period, mainly driven by market depreciation.  This was accompanied by a 31% drop in new product launches in these categories, which Morningstar attributes to a combination of market conditions and reticence in the face of ongoing and expected regulatory changes.

    Reclassification trend continues

    Another notable trend evident in the Morningstar data is the reclassification of existing products by asset managers.  During the third quarter of 2023 Morningstar observed 279 funds changing their SFDR status, of which 250 were upgrades following the introduction of greater ESG integration or in some cases a complete strategy redesign.  The upgrades were mostly Article 6 products moving to Article 8.  During the same period 11 Article 9 funds dropped down a category, with 18 Article 8 funds also moving down to Article 6.  A third of Article 8 funds still have no target percentage of sustainable investments, but there is a distinct trend for managers of these products to increase their exposure in this respect.  Some providers have moved from 0% towards 51% or more since the second quarter of 2023.  Non-sustainable assets may include instruments held for hedging or liquidity purposes.

    Image courtesy of Tom from Pixabay
    Richard Tyszkiewicz
    Richard Tyszkiewicz
    Richard has over 30 years’ experience in the international investment industry. He has worked closely with major Nordic investors on consultancy projects, focusing on the evaluation of external asset managers. While doing so, Richard built up a strong practical understanding of the challenges faced by institutional investors seeking to integrate ESG into their portfolios. Richard has an MA degree in Management and Spanish from St Andrews University, and sustainability qualifications from Cambridge University, PRI and the CFA Institute.

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