Asset managers have downgraded over 300 investment funds from the dark green Article 9 classification under the Sustainable Finance Disclosure Regulation (SFDR) to the lighter green Article 8 over the past few years. Pension funds invest relatively little in these funds, but are taking action regardless.

The French asset manager Amundi alone downgraded 51 investment funds from Article 9 to Article 8 in the past four months, according to a study by Morningstar.

Amundi, declining to answer any questions for this article, has been far from the only asset manager to reclassify its funds in recent months.

A fund that is classified as Article 9 under the SFDR can only invest in activities deemed to promote sustainability. The criteria for Article 8 funds are less strict; they just need to take into account sustainability in their investment strategy.

Level 2 regulation

In total, more than 300 investment funds were downgraded from Article 9 to Article 8 between October 2022 and January 2023. The immediate cause of the mass downgrades was the coming into force of the SFDR’s Level 2 regulation.

Since 1 January, Article 9 funds have to report specifically how individual companies in their portfolios promote sustainability.

Dutch asset manager Kempen is another example of a firm that recently downgraded several funds. A spokesman for the firm says that Kempen had, after the Level 2 regulation of the SFDR was made public, realised several funds did not have narrow enough a focus to qualify as an Article 9 fund.

“In hindsight, we believed Article 8 was a better fit for these funds. Article 9 is more suited for thematic funds with a specific focus,” the spokesperson said. Kempen downgraded three funds to Article 8: the Kempen Sustainable Europe Small-Cap fund, the Kempen Euro Sustainable Credit fund and the Kempen Global Sustainable Equity fund.

The question remains, however, why asset managers branded such broad funds ‘Article 9’ in the first place.

Many reclassified funds even had a passive approach – eight out of the 10 biggest investment funds that were downgraded from Article 9 to Article 8 were passive funds.

Still, these funds got an Article 9 classification, even though the asset managers must have realised the funds were not dark green impact funds in the strictest sense of the term.

fund downgrades morningstar

Source: Morningstar

The fact is that Article 9 funds were far more popular with investors in 2022 than their Article 8 counterparts. According to Morningstar, net money continued to flow into Article 9 strategies throughout 2022, while Article 8 funds suffered massive outflows.

Red flag

Most of the downgraded funds invest in listed equities. Pension funds do not invest much in this kind of vehicles; they are mostly popular with retail investors.

But this doesn’t mean that pension funds can simply shrug their shoulders about the wave of downgrades, according to Manuel Adamini, who advises pension funds about their sustainability policies at the Dutch fiduciary management practice of Columbia Threadneedle Investments.

After all, while pension funds may not invest directly in the affected funds, they often have awarded mandates to the affected asset managers.

“If an asset manager has had many downgrades, this could be a red flag,” said Adamini. “Some asset managers have used SFDR classification as a green label. That smells of greenwashing.”

Serious conversations

Columbia Threadneedle Investments has, sometimes on the initiative of its pension fund clients, had “serious conversations” with asset managers that turned out to be less green than they had initially claimed.

“We indeed encountered some cases of asset managers who had downgraded funds. Of course, they will then say that this is proof that they take sustainable investing more seriously and that they are reassessing their own sustainability criteria. Or they say legislation has been evolving, and that with the benefit of hindsight a lighter green classification has turned out to be more suitable.”

But not all asset managers received the benefit of doubt from Adamini and his clients. “There are asset managers that we have parted ways with,” he said, declining to reveal any names.

The Kempen spokesperson said customers have responded to the downgrades “with understanding”. “These pension funds themselves were also busy assessing the consequences of the evolving legislation and reclassifying their portfolios. As a result, they recognised the unclarity in the market surrounding Article 9.”

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