Asset managers are all busy reclassifying their funds according to sustainability objectives. Indeed, since March 2021, the (SFDR) determines the reporting obligations.
The European regulation gives asset managers the freedom to make no sustainability commitments in their funds, apart from taking into account the sustainability risks of their investments. In such a case, these funds are then classified under article 6 of the SFDR. By opting for this approach, fund managers do not take any additional regulatory risk.
Fund producers will find it difficult to distribute article 6 funds.
The real issue may well be commercial, Thierry Feltgen, head of SRI strategy & stewardship at Banque de Luxembourg Investments, explained during an interview: “Fund producers will find it difficult to distribute article 6 funds.” Indeed, consumer protection rules, known as , which stands for the Markets in Financial Instruments Directive, require distributors of investment products to ask their clients about their sustainability intentions.
“A fund that is listed as not investing in sustainable assets and not taking into account the negative impacts of its investments does not tick the boxes that are provided for under Mifid in terms of sustainability preferences,” said Feltgen. “Therefore, if we want to have a place at the table in the retail distribution market, we have an interest in offering funds classified under article 8 of the SFDR.” As a result, distributors, between managers and clients, have had no choice but to adapt their fund offerings to the minimum level of a responsible or committed client base.
Between 8 and 9: 8 plus
For its part, BLI has announced that it has classified all of the sub-funds of its BL Sicav under article 8--with one exception--thus promoting sustainability factors, without being obliged to have sustainable investments. The fund manager had the option of classifying its funds as article 9, which would then only have to invest in sustainable assets, but preferred to limit itself to funds classified as what they are calling ‘article 8 plus’.
As a result, the appendices to the prospectuses of these funds state that they are committed to investing a proportion of their portfolio solely in sustainable assets, in addition to simply promoting the sustainability objectives. At BLI, the average of these parts of the portfolios is around 30% of the invested assets per fund.
We have to be very clear about the sustainability objectives of these securities, what we want to do with them, how we define a sustainable asset, and so on.
If 30% of the assets in the portfolio are invested according to sustainability criteria, the reporting obligations are the same as for article 9 funds. “We have to be very clear about the sustainability objectives of these securities, what we want to do with them, how we define a sustainable asset, and so on,” stated Feltgen. “Funds that promote sustainability factors and at the same time commit to investing part of their portfolio in sustainable assets are in a way the antechamber of article 9 funds.”
More article 9 funds?
The need for transparency in prospectus annexes goes even further for asset managers who choose ‘article 8 plus’ funds. In addition to information on the investment strategy promoting sustainability, “it must be stated whether the assets classified as sustainable comply with the European taxonomy and whether they are sustainable assets with an environmental or social objective”, said Feltgen.
Even though BLI is currently creating two article 9 funds, the asset manager observed that the market trend is not naturally towards a majority of funds classified as such. On the one hand, many clients wish to maintain neutrality in their investment choices. On the other hand, investing only in sustainable assets greatly reduces the scope for investment.
Thus, in order to build portfolios that combine financial and extra-financial performance, managers of article 9 products will have to greatly expand their analytical capabilities. This, of course, is not possible without the recruitment of new talent.
This article was published for the Paperjam+Delano Finance newsletter, the weekly source for financial news in Luxembourg. . Read the original French version of this article on the site.