Asset managers downgraded funds holding a total of €175 billion of assets in Q$ 2022 from the most stringent category under the European Union’s Sustainable Finance Disclosure Regulation (SFDR), according to data from Morningstar.
As the SFDR approaches its second anniversary in March, managers are in the process of implementing tougher disclosure rules that came into effect this January.
As the report notes, since last September, roughly 420 products changed SFDR status, with 40% of Article 9 category strategies downgraded to Article 8 or €175 billion in assets.
“We expect the recent wave of Article 9 fund downgrades to continue, raising questions about what will remain and how useful that category will be,” said Bioy.
Last November, Europe’s largest fund manager Amundi said it would reclassify “almost all” of its Article 9 funds.
Just 3.3% of fund assets are now marketed in the highest sustainability bracket, while 52.2% are in Article 8.
Following the downgrades, according to Morningstar nearly two-thirds of Article 9 funds plan to have more than 70% exposure to sustainable investments, but only 6.3% between 90% and 100%.
The European Securities and Markets Authority recently clarified that Article 9 funds should only hold sustainable investments, Morningstar noted.
However, despite the downgrades as well as the slower economic climate, sustainable investing remained resilient last year
A separate report from Morningstar showed that global sustainable funds attracted $37 billion of net new money in the fourth quarter, stemming the outflows.
This was in contrast to the broader market which saw $200 billion of net outflows as rising interest rates and economic concerns rattled investor confidence, it added.
For the year, assets in sustainable funds reached $2.5 trillion, down from $3 trillion at end-2022. Europe continues to dominate the landscape, accounting for 83% followed by Australia and Canada.
The US is in reverse due to a political backlash against sustainable investing in some Republican-run states, withdrew cash.
“The rebound in global inflows into sustainable funds was driven by Europe, where investor appetite remains strong and supported by a favourable regulatory environment,” said Bioy.
She added, “The US ESG fund market, however, faced headwinds: macroeconomic of course, but also political, with prominent politicians speaking and acting against ESG investing.”
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