During his presentation at Sustainable Investing Festival Hortense Bioy, global director of sustainability research at Morningstar, revealed that Article 8 funds have been more affected by the “challenging” market environment in recent months, recording negative net inflows year-to-date. .
At the same time, Section 6 General Funds recorded positive net flows for fund flows in the first quarter, but this trend turned negative in April-May.
Article 9 funds, on the other hand, have held up better since the beginning of the year, maintaining positive net inflows.
As Bioy said, “It’s been a good story for the Article 9 funds, not so much for the Article 8.”
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The different fund labels refer to the different categories under the current EU SDFR regulations.
Article 6 refers to “general” portfolios, essentially any fund available, and does not promote an explicit ESG approach other than risk assessment.
The other two, 8 and 9, are more focused on ESG, with the first applying to funds promoting social and environmental objectives, thus taking more into consideration than a simple risk assessment.
Article 9 funds go one step further by requiring a fundamental ESG objective and focus.
2022 has been a tough year for fund flows in general, particularly in equities where frequent volatility, rising inflation and rising interest rates create headwinds. This is combined with a depressive social and political context.
Funds focusing on ESG and sustainability had seen a positive evolution before 2022, alongside growing investor awareness and consideration of climate and social issues.
Morningstar data showed this to be a particularly strong trend in Europe, with 82% of global ESG funds made up of European assets.
Europe has been a leader in this area of the market, launching its SFDR regulations in March last year and other data from Morningstar confirming this. In total, Articles 8 and 9 funds represent 4.3 billion euros, “nearly half of the assets of EU funds”, Bioy said.
Bioy added that admissions were a key driver of asset development in this space, alongside “product innovation.”
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Currently, ESG-focused funds tend to fall into the realm of equities, usually as active funds.
“I think we’re going to see more product development in this space,” Bioy said. She pointed out that 84% of ESG funds are equity funds and therefore “fixed income securities are currently underrepresented”.
Another peculiarity that Bioy pointed out between the Article 8 and 9 funds was that among the 20 largest Article 8 portfolios, only two included the term ESG or sustainable in their name, and that these were the passive options: the fund Northern Trust World Custom ESG Equity Index and iShares MSCI USA SRI ETF.
This was almost the exact opposite of the Article 9 list, where most fund names included explicit ESG language.
Due to the lower ESG requirements of Article 8, Bioy said this may lead to some “confusion and accusations of greenwashing as these funds would not have been marketed as ESG before the SFDR, but they now say they are “light green”.
“So that was confusing,” Bioy said, but confirmed that these Article 8 funds are “ESG-integrated.”