SFDR Funds Report
The international research institution Morningstar released the second quarter European SFDR Funds report, which aims to study the issuance, investment and allocation changes of sustainable funds.
In March 2021, the European Union announced the adoption of the Sustainable Finance Disclosure Regulation (SFDR) and required asset management companies to disclose the sustainability risks of investment products. SFDR specifically stipulates that sustainable funds can be divided into two categories, Article 8 and Article 9. With the revision of SFDR, the classification of sustainable funds has also changed.
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Overview of SFDR Funds
Under the background of rising interest rates and high inflation, the development of SFDR Funds has diverged, and the market’s enthusiasm for SFDR funds declined in the second quarter. In the first quarter, Article 8 funds saw inflows of 26 billion euros and Article 9 funds took in 4.4 billion euros. In the second quarter, Article 8 funds had outflows of 14.6 billion euros and Article 9 funds had inflows of 3.6 billion euros.
In terms of rankings, the Goldman Sachs Enhanced Index Sustainable Global Equity Fund (Article 8 fund) ranks first with a net inflow of 3.2 billion euros. Goldman Sachs Green Bond R Cap USD (Article 9 fund) ranks first with a net inflow of 2.0 billion euros. Funds with passive strategies have seen better inflows than active strategies.
Despite the overall outflow of funds, the newly issued funds and the asset appreciation aggregated by the market made the total assets of SFDR Funds increase by 1.4%. The total size of Article 8 funds and Article 9 funds exceeded 5 trillion euros for the first time, accounting for 56.4% of the total size of the European fund market (Article 8 funds accounted for 52.9%, and Article 9 funds accounted for 3.5%). In terms of the number of funds, there are 10,649 Article 8 funds and 947 Article 9 funds, accounting for 45.5% of the total European fund market.
Reclassification of SFDR Funds
After asset management companies adjusted the investment target of the funds, a total of 210 funds changed their classification in the second quarter, of which 197 funds raised their sustainable level. 182 were changed from Article 6 to Article 8, and 12 were changed from Article 8 Changed to Article 9,3 were changed from Article 6 to Article 9. The changes are directly related to the guidance issued by the EU in April this year. In the guidelines, the EU considers that as long as funds track the Paris Agreement and climate transition benchmarks, they fall into the Article 9 category automatically.
The regulatory adjustments to fund classification have also increased the share of passive funds in SFDR Funds. Among Article 9 funds, the proportion of passive funds rose from 6% in the first quarter to 11.7%. Passive funds accounted for 11.2% of Article 8 funds, unchanged from the first quarter.
In terms of asset classes held by SFDR Funds, stocks are still the most important part (50% in Article 8 funds and 70% in Article 9 funds). Bonds took second place, reaching 30% and 20%, respectively.
Application of PAI in SFDR Funds
Principal Adverse Impact (PAI for short) is an important feature of SFDR Funds, and it also meets the definition of double materiality (Double Materiality). Currently, 89% of Article 8 funds and 97% of Article 9 funds have considered PAI. Of the 14 PAI indicators, 10% of Article 9 funds have taken all of them into account.
In terms of specific PAI indicators, controversial weapons, violations of UNGC or OECD guidelines, and exposure to fossil fuels occupy the top three considerations in SFDR, accounting for more than 70% of Article 8 funds and more than 80% of Article 9 funds. In contrast, consideration of carbon emissions data accounts for about 50% of Article 8 funds and 60% of Article 9 funds.
The fund’s consideration of the PAI index is actually directly related to the information disclosure of the investees. At present, only 0.4% of companies have included more than 90% of PAI indicators, and only 12% of companies have included more than 80% of PAI indicators. Only 22% of companies have disclosed information on PAI indicators related to carbon emissions, that is why the proportion of funds considering PAI on carbon emissions is relatively low.
Reference:
SFDR Article 8 and Article 9 Funds: Q2 2023 in Review
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