Fund Market under SFDR
The European Fund and Asset Management Association (EFAMA) has released a report on fund market under SFDR.
The SFDR (Sustainable Finance Disclosure Regulation) came into effect in March 2021, establishing a set of disclosure obligations related to sustainability for financial market participants. According to SFDR, asset management companies need to disclose the sustainability of fund products.
Development of Fund Market under SFDR
There are some requirements for sustainable disclosure of fund market under SFDR:
- Article 6: All fund managers need to disclose the integration of sustainable risks and the potential impact of these risks on product returns.
- Article 8: Funds with environmental and social characteristics need to clearly disclose how to achieve their promoted impacts.
- Article 9: Funds with sustainable development goals need to clearly disclose how to achieve them and whether reference benchmarks have been formulated.
Status of SFDR Articles 8 Funds and Article 9 Funds
In the first quarter of 2021, the total size of Article 8 funds in the European market was 3.76 trillion EUR, accounting for 25% of the entire fund market. In the second quarter of 2022, this scale has grown to 5.52 trillion EUR, with a market share of 38%. At the end of 2022, this scale increased to 6.44 trillion EUR, with a market share of 45%.
The growth of Article 8 in 2022 mainly came from the tightening of SFDR standards, which led to the reclassification of many Article 9 funds into Article 8 funds. Correspondingly, at the end of 2022, the size of Article 9 fund was 341 billion EUR, a decrease of 19% compared to six months ago.
In terms of registration of Article 8 funds, Luxembourg (34%), Ireland (16%), France (14%), the Netherlands (10%), and Sweden (7%) occupy the top five positions, and collectively account for 82% of the total size of Article 8 funds. Article 8 funds in Luxembourg account for 54% of all UCITS assets.
In terms of registration of Article 9 funds, Luxembourg (51%), France (18%), and Ireland (7%) occupy the top three positions, while the proportion in other regions is less than 5%. Due to the tightening of standards in the second half of last year, the proportion of Article 9 funds in Luxembourg and France decreased.
EFAMA’s Recommendations for SFDR Fund Classification
EFAMA believes that the definition of sustainable investment is affecting the SFDR fund classification. Last June, the European Securities and Markets Authority (ESMA) required that all Article 9 funds’ investments be sustainable. Previously, asset management companies believed that there could be a small portion of unsustainable investments in Article 9 funds. In the fourth quarter of 2022, 307 Article 9 funds were reclassified as Article 8 funds.
In 2023, regulatory agencies relaxed the definition of sustainable investment. The EU believes that as long as three criteria are met (contributing to environmental or social goals, not damaging existing sustainable development, and in line with good governance), asset management companies can define sustainable investment on their own. Some funds that track the Paris Aligned Benchmark (PAB) and Climate Transition Benchmark (CTB) may be reclassified from Article 8 to Article 9. If SFDR changes in the future, the classification of the fund market will also change accordingly.
In addition, EFAMA believes that ESG data and rating suppliers should also become regulatory targets. When data from the investees are inaccurate and untrue, asset management companies may face the risk of greenwashing. Meanwhile, different data providers have different disclosure standards. For example, Sustainalytics classified 212 companies as not compliant with the United Nations Global Compact (UNGC), while MSCI believes that only 8 companies are not compliant with UNGC. In response to these issues, the European Union has begun to establish corresponding rules for ESG rating agencies to improve the transparency of information disclosure.
Related Post: EU Proposes Regulation on ESG Rating Services
Reference:
Fluctuations in the SFDR Fund Market and Policy Recommendations
