Funds classifed as Article 9 under the EU’s sustainable finance disclosure regulation (SFDR) have bled money for the second consecutive quarter, seeing outflows of almost €4bn, according to Morningstar first quarter analysis.
By comparison, flows into Article 8 funds rebounded, drawing in €14bn after three quarters of outflows. Inflows were driven by fixed income and passive strategies.
In its report – SFDR Article 8 and Article 9 Funds: Q1 2024 in review – Morningstar also said that Article 6 funds have once again seen better flow performances over five quarters compared to that of their Article 8 and 9 peers. Article 6 funds attracted €43bn of net subscriptions, representing a significant increase from the previous three quarters of small inflows.
The combined assets in Article 8 and Article 9 funds increased by more than 4% over the first quarter to a record €5.5trn, Morningstar said. Article 8 and Article 9 funds’ market share climbed further to nearly 60% of the EU fund universe primarily because of continued reclassification from Article 6 to Article 8 or Article 9.
“Article 8 funds are attracting money again after a year of redemptions, but they are still trailing the rest of the market. While active ESG managers are licking their wounds, passive ESG investments continue to appeal to more investors,” said Morningstar global director of sustainability research Hortense Bioy, who authored the report.
These outflows come at a point when the outlook for the Sustainable Finance Disclosure Regulation (SFDR) within the European Union remains uncertain, added Bioy.
In January 2024, the European Commission confirmed in a public hearing that the publication in the Official Journal of revised SFDR regulatory technical standards would be delayed and that the application date could be sometime in 2025. The Commission is currently considering revising SFDR, and several trade associations have been pressing it to address the review of founding regulation and the technical standards jointly.
Sustainable investment targets
Over a third of Article 8 funds and 77% of Article 9 funds target environmental investments, while 26% of Article 8 funds and 56% of Article 9 funds commit to holding social investments.
Additionally, Morningstar identified around 220 funds that altered their SFDR status in the first quarter, including roughly 190 that upgraded to Article 8 from Article 6.
While around 367 Article 8 funds revised their minimum sustainable investment commitment in Q1 2024, the report also found that over a third of Article 8 funds do not commit to making any sustainable investments.
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