In one year, Brussels has revolutionized the ESG fund market

The European SFDR regulation will celebrate its first anniversary on March 10. This technical acronym, for Sustainable Finance Disclosure Regulation, has transformed the landscape of sustainable finance in Europe in just one year.

Until then, so-called “green” or “sustainable” funds were very much in the minority. Only a small proportion was labeled by national bodies. Now, they weigh 29% of the European market, with 6,660 products ranked in the highest categories of SFDR. And 42% of outstandings, with 4,000 billion euros in long-term assets (excluding money market) at the end of December, according to the latest count from Morningstar.

How is this sleight of hand possible? For the past year, management companies have been required to classify their funds themselves in the new categories defined by SFDR. Most of them have stepped into the breach by putting their products at the top of the pile. That is to say in categories 8 and 9 – the most demanding – of the European regulations.

“Green washing”

Article 8 funds incorporate environmental or social investment criteria. Article 9 vehicles, which are less numerous (4.7% of outstandings), must also pursue a sustainable investment objective.

Problem: “The lack of clear guidelines has resulted in different approaches”, which “Leads to confusion and greenwashing issues”, Morningstar warns. Even “social washing”, as shown by the high exposure of ESG funds (based on environmental, social and governance criteria) in Orpea, the group of retirement homes currently in turmoil.

Morningstar had also indicated in February to the “Financial Times” that it had removed 1,200 investments from its own list of sustainable funds, already more restrictive than the European classification. These are essentially Article 8 products with “ambiguous language,” the company explains.

This alert does not disturb the irresistible rise of Article 8 and 9 funds. Last spring, two and a half months after the entry into force of SFDR, they represented only 20% of the market’s assets, according to Morningstar. The company anticipates that the 50% mark will be crossed in mid-2022, or even before.

Fund creations and reclassifications

These products already represent more than half of fund creations in Europe. Asset managers have also classified some existing strategies in Articles 8 or 9, “by improving ESG integration processes, adding ESG exclusions or adopting entirely new strategies”, notes Morningstar. However, “the changes justifying a reclassification vary in depth and breadth”.

The German DWS, accused of greenwashing by its former director of sustainable development, intends to store almost all of its European funds in Articles 8 or 9. Natixis IM is aiming for a ratio of 50%, like the American BlackRock (excluding ETFs ). Already at 40%, Amundi alone accounts for 5.5% of the European sustainable investment market, ahead of the Scandinavians Nordea (4.2%) and Swedbank (3.5%).

A spotlight

The challenge is above all commercial. Article 8 and 9 vehicles captured 64% of European collections in the last quarter. And the movement should increase with the entry into force this summer of the revision of the MiFID 2 directive. Financial advisers will then have to ask savers about their preferences in terms of sustainable finance.

“If we listen to them, asset managers will save the world,” tackles the marketing manager of a management company. But, in reality, the composition of portfolios has changed little. A little sincerity would be welcome. The entry into application of SFDR technical standards could help to see things more clearly, if not to impose minimum standards. However, it has been postponed to early 2023.

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