Up to 25% of funds of total European funds under more stringent SFDR rules

Funds subject to higher standards of disclosure under the European Union’s Sustainable Finance Disclosures Regulation (SFDR) regime currently represent up to 21% of total European funds and 25% of total European fund assets, according to research from Morningstar.

The SFDR, which came into force on 10 March, requires asset management firms to classify each fund as either Article 6, 8, or 9, depending on the product’s sustainability objective.

Article 8 products are those which actively promote environmental or social (ESG) characteristics, while Article 9 have sustainable investment as their objective.

Morningstar reviewed 49.3% of the 11,500 open-end funds and exchange-traded funds domiciled in Luxembourg, Europe’s largest funds domicile.

Of these, 18.0% and 3.6% were classified as Article 8 and Article 9, respectively, representing combined assets of €768bn, or 25% of the reviewed Luxembourg funds universe.

Based on the preliminary research, the date provider estimates the European ESG and sustainable fund market, based on SFDR definitions, could currently be worth as much as €2.5trn.

It expects this figure to grow as managers have plans to enhance existing strategies, reclassify funds, and launch new ones that will meet Article 8 and 9 more stringent requirements.

The report notes that in this first classification exercise, asset managers have taken different approaches based on their interpretation of the regulation, with some preferring to take a conservative approach for fear of having to downgrade funds later.

On a relative basis, the report, which surveyed 30 asset managers, found that Nordic and Dutch asset managers feature among those with the highest proportion of Article 8 and 9 funds.

This is not surprising though given the long history and commitment to responsible investing of institutional investors in Northern European countries.

For example, Robeco has labelled 96% of its fund assets as Article 8 or 9, while KLP and SEB have 95% and 82% of their fund assets, respectively, in the two categories.

French managers Amundi and BNP Paribas which offered some of the largest ranges under Article 8 and 9 come in with a respective 60% and 80% of their existing fund assets.

It found that other large asset managers, including BlackRock, UBS, and JP Morgan, exhibited much lower ratios at 17%, 11%, and 1.5%, respectively.

“It is clear from the asset managers we spoke to, of various nationalities and sizes, that it is essential for them to have as many funds as possible classified as Article 8 or 9 under SFDR,” says Hortense Bioy, Global Director of Sustainability Research. “They see compliance with at least Article 8 requirements as an opportunity to demonstrate their commitment to sustainable investing.”

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