The Sustainable Finance Disclosure Regulation (SFDR) requires Ucits exchange-traded funds to be identified as article 6, 8 or 9, based on their sustainability considerations. Article 9, or “dark green” funds, have a sustainable investment objective, “light green” article 8 funds promote environmental and/or social characteristics, while article 6 funds do not have ESG criteria.
Trackinsight’s March 2023 note stated that as many as 70% of article 9 ETFs have been reclassified from article 9 to article 8. This is partly due to lack of clarity around how terms like “sustainable” and “sustainable investments” are defined. Incorrect classifications can result in funds being marketed as being more sustainable than they are, and can even lead to greenwashing, said the note.
“Loose definitions can result in significant discrepancies in fund classification,” said Trackinsight, which said that stakeholders and investors have called for clearer and stricter classification criteria in the SFDR regulation. The recent voluntary reclassifications to article 8 seem to show that fund managers are “playing it safe.”
According to Trackinsight’s global ETF survey 2022, only one in four European ETFs are classified as article 8 or article 9 (data as of 31 December 2021). Out of the 2,711 ETF share classes covered by Trackinsight, 595 (22%) were article 8 and only 108 (4%) were article 9.
The downgrades of ETFs from article 9 to article 8 appear to be part of a wider trend. A Morningstar report published in January, for example, found that €175bn of article 9 funds were downgraded in Q4 2022.