Passives’ Article 9 market share shrinks in Q4 shake-up

Morningstar reports 'radical changes' to sustainable fund landscape in fourth quarter

Article 9 funds saw the lowest inflows on record in the last quarter of 2023, due to the large number of downgrades from Article 9 to Article 8 ahead of new Sustainable Finance Disclosure Regulation (SFDR) requirements that came into force in January.

In a report, SFDR Article 8 and Article 9 Funds: Q4 2022, Morningstar noted the “radical changes” seen in the European sustainable fund universe as asset managers preparing for SFDR Level 2’s regulatory technical standards (RTS) deadline of 1 January 2023 led to 419 products changing status, including 307 that downgraded from Article 9 to 8.

The new requirements ask providers to disclose more information on their funds’ ESG approaches, sustainability risks, and impact in precontractual documents and periodic reports. Industry participants have expressed a lot of confusion surrounding the requirements to be an Article 9 fund and the European Commission issued a statement of clarification in June last year.

Hortense Bioy, global director of sustainability research and member of the ESG Clarity EU Committee, commented: “Almost two years after SFDR came into force, the landscape of funds marketed as green in the EU is going through some radical changes. 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. Investors will increasingly look beyond Article 8 and Article 9 and focus instead on the level of exposure to sustainable investments, which cut across both classifications.” 

Quarterly flows into Article 8 and Article 9 funds versus Article 6 funds (€bn)

Quarterly Flows Into Article 8 and Article 9 Funds Versus Article 6
Source: Morningstar Direct

Overall assets in Article 8 and 9 funds rose by 7.3% over the period to €4.6trn, pushing their combined market share to 55%. Article 8 funds “went back into black”, said Morningstar, gathering €10.7bn of new money, but Article 9 products saw the lowest inflows on record of €5.1bn due to the wave of downgrades.

The research firm noted the positive Article 8/9 inflows were in contrast to the €3.3bn outflows seen by Article 6 funds, which suffered more from the continuously challenging macro backdrop of inflationary pressures, interest-rate hikes, and lingering recession fears.

See also: –Article 9 downgrades a result of ‘signing up with no plan’

Change in status

Morningstar noted €175bn in assets were affected by a change in classification in the final quarter of 2022 – more reclassifications are expected and the number of Article 9 funds is expected to decline from its current level of 1,080. Some 419 funds altered their SFDR status: 108 were upgrades, the majority (85) of which moved to Article 8 from Article 6, representing €27bn of assets, while three upgraded to Article 9 from Article 6, and 20 funds moved to Article 9 from Article 8.

As mentioned, 307 funds were downgraded to Article 8 from Article 9, while four Article 8 funds switched to Article 6.

Passives were most affected by the downgrades with their market share of the ‘dark green’ category (Article 9) shrinking from 24% to 5% in Q4. Amundi and BlackRock were the groups with the largest among of assets held in funds that downgraded.

Top 20 asset managers by assets of Article 9 funds downgraded to Article 8

Top 20 Asset Managers by Assets of Article 9 Funds Downgraded to Article 8
Source: Morningstar Direct

The report said: “A disproportionate number (41%) of Article 9 funds that have been reclassified to Article 8 were passive, the quasi-totality being ETFs and index funds tracking Paris-aligned or climate-transition benchmarks. But a handful of passive thematic/sector have been downgraded, too. These include iShares Global Clean Energy ETF, iShares Smart City Infrastructure ETF, BNP Paribas Easy ECPI Circular Economy Leaders, BNP Paribas Easy ECPI Global ESG Hydrogen Economy, as well as Lyxor Corporate Green Bond (DR) ETF, which may come as a surprise.

“These asset managers noted the underlying indexes were not designed to include only sustainable investments as defined by SFDR; therefore, the funds couldn’t keep their Article 9 classification, some adding that the products would be classified again as Article 9 if there is a clear statement from the regulator that climate-transition and Paris-aligned benchmarks qualify automatically for Article 9. This is indeed a question that has been posed by the European Supervisory Authorities to the European Commission.”


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...