Based on EET data, over 1,500 Article 9 funds at risk of losing their status

by | Sep 9, 2022

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As at the end of August, FE fundinfo, the Fund Data and Technology Company has received European ESG Templates (EETs) for over 94,000 share classes or products from 287 providers.

Of those 94,000, there are an almost equal number of Article 6 (42,400) and Article 8 (42,000) share classes.

However, the most interesting insight is drawn from the 6,000 Article 9 funds.

The SFDR defines an Article 9 product as a “product [that] has sustainable investment as its objective”, that contributes to an environmental or social objective, “provided that such investments do not significantly harm any of those objectives and that the investee companies follow good governance practices”. This has all been interpreted to mean that impact funds, which, by definition, contribute to one or more environmental or social objectives, should be classified as Article 9.

In June this year, the EU financial regulators (the ESAs) reminded groups of last year’s ruling from the European Commission that Article 9 products “may invest in a wide range of underlying assets, provided these underlying assets qualify as ‘sustainable investments’”. The regulators’ version was blunt: “For the avoidance of doubt…[Article 9 products] should only make sustainable investments”.

Article 9 funds may actually contain other investments, as the ESAs said that they may “also include investments for certain specific purposes such as hedging or liquidity” but they still “have to meet minimum environmental or social safeguards”. This implies that these funds still need to consist almost entirely of sustainable investments.

Of the 6,000 Article 9 funds/share classes, 79 have 100% as the minimum investment in sustainable investments, with a further 168 setting a minimum of 90%. The vast majority of Article 9 funds have left this field on the EET blank so far, but 663 set a minimum level of 0%, and another 780 have a minimum of between 0.1% and 85% in sustainable investments.

Even if it is assumed that all of those Article 9 funds with no stated minimum in sustainable investments will end up with close to 100% when they update their prospectus and populate the field, that still means that at least 1,500 funds might need to review their Article 9 status.

It will be interesting to see which way this goes – will article 9 funds tighten up their investment criteria or will groups start to reclassify their funds as Article 8, which have no minimum requirement for sustainable investment?

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