The fund research frim Morningstar found that from October to December 2022, the ESG status of 419 funds was changed--307 of these changes were downgrades from article 9 to article 8. Photo: Shutterstock

The fund research frim Morningstar found that from October to December 2022, the ESG status of 419 funds was changed--307 of these changes were downgrades from article 9 to article 8. Photo: Shutterstock

A recent Morningstar report revealed that 307 funds classified as article 9 have been downgraded to article 8 funds since September 2022. These funds represented €175bn in assets, and additional reclassifications are expected as new documents are processed.

The Sustainable Finance Disclosure Regulation came into force in the European Union in March 2021. It requires asset managers to classify investment funds as article 9 (“dark green” funds that have a sustainable investment objective), article 8 (“light green” funds that promote environmental and/or social characteristics) or article 6 funds (which do not have ESG criteria).


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As of 1 January 2023, asset managers are now required to “disclose more information on their funds’ environmental, social and governance approaches, sustainability risks and impact” in documents and reports. Before this “upgraded” regime was implemented, “many managers reviewed their funds’ classification and downgraded article 9 products to article 8,” said the Morningstar report, published on 26 January.

Article 9 funds only bring in €5.1bn in Q4 of 2022, article 8 funds swell

In the fourth quarter of 2022, the status of 419 funds was changed--307 of these changes were downgrades from article 9 to article 8. This represented €175bn in assets, or 40% of the article 9 category, noted the report. Since September 2022, article 9 funds only brought in €5.1bn.

This is the lowest amount of inflows on record and is partly due to the recent downgrades, said Morningstar. 41% of article 9 funds that were downgraded were passive--most of these were exchange-traded funds and index funds tracking Paris-aligned or climate-transition benchmarks.

Article 8 funds, however, pulled in €10.7bn net new money during the same period, while article 6 funds experienced €3.3bn of outflows, as they “suffered more from the continuously challenging macro backdrop of inflationary pressures, interest-rate hikes, and lingering recession fears,” stated the report.

108 of the 419 classification changes were upgrades--85 funds moved from article 6 to article 8 (representing €27bn of assets), three were upgraded from article 6 to article 9, and 20 funds were upgraded from article 8 to article 9.

Assets in article 8 and 9 funds rose by 7.3% to €4.6trn

From October to December 2022, the report found that assets in article 8 and 9 funds rose by 7.33% to reach €4.6trn, putting their combined market share at 55.5%. Article 6 fund assets decreased by 1.1% during the same period.

Morningstar also found that 165 article 8 funds and 49 article 9 funds were launched from October to December 2022. General ESG- and sustainability-focused offerings accounted for the largest part of the product development activity, but climate was the most popular theme represented among new product launches, said the report.

New article 8 and article 9 funds made up 57% of the total number of funds launched in the EU in Q4 of 2022.

Do article 8 and 9 funds better manage ESG risks?

They do, found the Morningstar report, and they also have lower exposures to controversial activities, such as controversial weapons, tobacco or thermal coal. However, the report also found that as many as 40.2% of article 8 products and 33% of article 9 portfolios “had over 5% exposure to fossil fuel companies at the end of September.”

The “relatively high fossil fuel involvement of article 9 funds,” which may seem surprising, is largely because “many of these funds invest in so-called transitioning companies.” The report gave the example of energy company AES, “which has wind and solar farms and has announced a plan to reach net-zero carbon emissions from electricity sales by 2040,” but most of its power generation today remains fired by fossil fuels.

Using sustainability terms in fund names

In November 2022, the European Securities and Markets Authority launched a on draft guidelines that cover the use of ESG- and sustainability-related terms in fund names. “The objective is to ensure that investors are protected against unsubstantiated or exaggerated sustainability claims,” said Esma chair Verena Ross, “while providing both NCAs [national competent authorities] and asset managers with clear and measurable criteria to assess names of funds including ESG or sustainability-related terms.”

The Morningstar report found that only 27% of article 8 funds with “sustainable” in their names would meet the proposed Esma rules, but 92% of article 9 funds would meet the requirement.