Article 9 ETFs underperform Article 8 counterparts on SFDR indicators

Study also finds misalignment with SDGs in Article 9 ETFs

ETFs categorised as Article 9 are performing worse on average on most Principal Adverse Impact indicators (PAIs), which refer to disclosure requirements under the EU’s Sustainable Finance Disclosure Regulation (SFDR), than Article 8 ETFs, a recent study has found.

They also show great misalignment with the UN’s Sustainable Development Goals than Article 8 counterparts.

In the report Dividing Lines: Matter sustainability analysis of the largest SFDR Article 8 and 9 ETFs, Matter Insights analysed the 60 largest ETFs that fall under UCITS regulation, and therefore fall under SFDR requirements, to understand why a large portion of the funds downgraded from Article 9 to Article 8 towards the end of 2022 were passive products. ETFs representing €290bn in assets were downgraded.

These ETFs were split under three categorisations:

1. Largest Article 8 ETFs pre-November 2022 – The 20 largest Article 8 ETFs by AUM, prior to the mass downgrade of ETFs from Article 9 to Article 8 between November 2022 and January 2023.

2. Largest ETFs downgraded from Article 9 to Article 8 – The 20 largest ETFs by AUM which downgraded from Article 9 classification to Article 8 classification between November 1st 2022 and January 2023.

3. Largest Article 9 ETFs post-January 2023 – The 20 largest remaining Article 9 ETFs by AUM, after the mass downgrade of ETFs from Article 9 to Article 8 between November 2022 and January 2023.

Among the key findings were Article 9 ETFs, which are largely majority thematic in focus, perform worse on average on the majority of PAIs under SFDR Level 2 – which discloses the negative effects on sustainability at both entity and product level – than either downgraded funds, the majority of which are Paris-aligned products, or pre-existing Article 8 funds.

Similarly, Article 9 ETFs are more likely to hold companies where the revenue generated from activities is misaligned with SDGs than their Article 8 counterparts.

This, the study suggested, could be down to SFDR failing to take into account for the long-term differences in strategy between ESG and Paris-aligned approaches, which are currently found under the Article 8 classification.  

See also: – French regulator recommends stricter SFDR criteria

For example, 18 out of 20 remaining Article 9 funds employ a thematic approach, 17 out of 20 downgraded ETFs employ ‘Paris-Aligned’ approaches, and 17 out of the 20 largest Article 8 ETFs employ broad-based ESG strategies (such as general integration, best-in-class etc).

“Although displaying similar sustainability characteristics, this divide fails to account for the long-term difference in strategy between ESG and Paris-aligned approaches, which are currently conflated under the Article 8 classification.”

The report continued it hoped this will be considered in the ongoing review of SFDR by the European Commission.

“There is a need for a middle ground that accounts for and delineates between the diverse routes necessary to reach a sustainable future, whilst employing realistic definitional guidance and thresholds in order to avoid greenwashing and ensure that SFDR remains rigorous. The [review] is crucial, therefore, if SFDR is to become the gold-standard sustainability disclosure framework that Europe and the wider world needs it to be.”


Natalie Kenway

Natalie is editor in chief at MA Financial covering ESG Clarity, Portfolio Adviser and International Adviser. She was previously global head of ESG insight for ESG Clarity and has been an investment journalist...