Article 9 ETF funds worth €270 billion have been downgraded

According to sustainability data provider Matter, hundreds of ETFs with €270 billion in assets under management were downgraded from Article 9 to Article 8 under EU sustainable investment laws.

According to the report, 307 Article 9 funds totaling €170 billion were reduced to Article 8 in Q4 2022, with another €99 billion downgraded in January 2023.Passive measures following Paris-Aligned and Climate Transition Benchmarks drove these downgrades, culminating in reclassification to Article 8.

Prior to the downgrades, the sustainable fund universe expanded by 65% between June and September 2021, after the March 2021 implementation of the Sustainable Financial Disclosure Regulation (SFDR).

Article 9 ETFs, according to Matter, are more likely to disappoint investors because they expose investors to higher degrees of SDG misalignment.

Article 9 ETFs also outperform the bulk of Principal Adverse Impact indicators, which highlight how specific investments pose long-term hazards.

The study also discovered that Article 8 funds were more likely to be Paris-aligned, but Article 9 funds were more likely to be SDG-aligned and to take a solutions-focused approach. This is illustrated by the fact that 18 of the 20 Article 9 grants use a thematic approach.

In comparison, 17 of the 20 newly downgraded Article 8 funds have a Paris-aligned strategy.As a result, Matter has encouraged EU regulators to recognise different sustainability goals, citing SFDR's failure to account for distinctions between ESG and Paris-aligned practises.

The report stated: “Although displaying similar sustainability characteristics, this divide fails to account for the long-term difference in strategy between ESG and Paris-aligned approaches, which are currently conflated under the Article 8 classification.”

Because of the uncertainties surrounding fund classification regulation, Europe saw a record low number of sustainable fund launches in the first quarter of 2023. As a result, the European Commission has moved to alleviate uncertainty by amending the SFDR to clarify whether investment products are classified as Article 8 or Article 9 funds.

By fLEXI tEAM