If you’ve read the financial press in recent months, you’ve surely come across references to ‘article 6’, ‘article 8’ and ‘article 9’ investment funds. These refer to sections in the EU’s Sustainable Finance Disclosure Regulation.
What is SFDR?
SFDR obliges asset managers, pension funds and other market participants to disclose a number of environmental, social and governance (ESG) metrics. The first provisions took effect in March 2021, with further steps introduced this year and major reporting requirements starting in 2023.
Within the fund industry, there has been a huge focus on sustainability data, such as the carbon emissions and biodiversity impact of the companies they invest in. However, information needs to be published on several other factors, including gender pay gap figures, human rights policies and anti-corruption practices at investee companies.
Asset managers also need to disclose the sustainability characteristics and objectives of their funds. This is where articles 6, 8 and 9 come in. Article 8 funds use sustainable criteria in their investment process, article 9 funds have a sustainable objective for their investments, while article 6 funds make no sustainability claims.
Denise Voss, chair of Luxflag, citing the labelling agency’s late general manager Sachin Vankalas, has said that “if you could just remember one thing,” article 8 investing “is about the process, incorporating these non-financial ESG factors as well as financial factors into the investment analysis and decision-making process”. In other words, ESG funds use environmental, social and governance criteria to screen out or select investments, alongside their existing financial and market analyses.
“Article nine is really about positive impact,” Voss explained. “It’s not about a process, it’s about a product. Now, article nine funds also use the same process, I’m sure. But they really are focusing on companies that are [making a] positive impact.” In other words, these funds explicitly aim to improve the planet.
Luxflag is an industry- and state-backed organisation that independently checks the responsible and sustainable investing claims made by asset managers. It is important to note that article 8 and 9 classifications are designed for regulatory compliance. They are not meant as marketing labels for investors. That is a function outfits like Luxflag serve.
Nearly half (45%) of Luxembourg fund flows recorded in 2021 were directed to sustainable funds, according to figures published by the Association of the Luxembourg Fund Industry, the fund data firm Morningstar and the consulting firm Zeb in June.
At the end of April 2022, 34% of European investment funds classified themselves as either article 8 or article 9, Hortense Bioy, global director of sustainability research and manager of research at Morningstar, said during a presentation of the report. 30% were classified as article 8 (using ESG criteria in their investment process), 4% as article 9 (directing investments towards companies and projects that have a positive impact) and 66% as article 6 (which do not promise to incorporate ESG factors, even if sometimes they partially do).
Bioy stated that the figure is “getting closer to 50%” and she expects it will pass the 50% mark “in the coming months.”
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