What did SFDR level 2 RTS change to the sustainable investment landscape?
Morningstar lays out in its Q4 2022 SFDR Article 8 and 9 Funds Review the latest developments in the sustainable investment sphere. The report lays out both a major wave of reclassification and more granular insights from the funds' European ESG Template.
- The authors confirm the downgrading trend of many sustainable funds from SFDR article 9 to article 8, or even 6, anticipating the entry into force of the SFDR level II transparency requirements.
- 307 article 9 funds were re-classified to article 8 end of 2022. These downgrades represent 175 B€, or 40% of all assets previously classified under article 9
- After 3 quarters of global outflow, article 8 funds saw positive inflows in Q4 2022, mostly due to the downgrade of article 9 funds.
- The market share of article 8 and 9 funds combined grew to about 55%, from 53% in Q3 2022.
Morningstar also stresses the main trends regarding the investment thesis of these funds, be they voluntary or imposed by SFDR:
- Less than 25% of sustainable funds exclude fossil fuel investment.
- About two thirds of article 8 funds have a minimum threshold of sustainable investment below 10%. The same part of article 9 funds set that threshold above 70%.
- 91% of article 8 funds have set no minimum quote for Taxonomy alignment, showing this metric is still a major point of complexity for investors.
- Morningstar found that about 3/4 of article 8 funds would not meet the ESMA's proposed rules on funds names.
These trends need to be closely monitored to make sure the (many) new rules carried out by the EU are properly understood and implemented over the next few years. Let's hope we will witness more radical changes for the benefit of transparency and SFDR alignment in the upcoming months!