Investors pulled a record €6.2 billion from the European Union’s most sustainable fund class in the three months ended June 30, marking a third straight quarter of withdrawals, according to data compiled by Morningstar Inc.
The funds, registered as Article 9, have set sustainable investment as their goal and must adhere therefore to the European Union’s toughest ESG disclosure requirements. Funds can also register in the lighter green category of Article 8, or not lay claim to any sustainability characteristics, in which case they’re considered Article 6.
While investors redeemed money from Article 9 funds, they put a net €26 billion into Article 8 funds during the second quarter, Morningstar reported. During the same period, a net €64 billion went into EU-based funds that have no environmental, social and governance goals at all.
The EU fund market is going through a “complete reshaping” as regulation in the bloc continues to evolve, said Hortense Bioy, head of sustainable investing research at Morningstar Sustainalytics. While the recovery for Article 8 funds is taking hold, it’s a much gloomier picture for Article 9 funds, she said.
The EU’s Sustainable Finance Disclosure Regulation, which defines what can be categorized as Article 6, 8 or 9 funds, went into effect in March 2021. Since then, the regulation has been widely criticised for containing confusing language and inadequate definitions. The rule is now under review.
Last month, the European Banking Authority, the European Securities and Markets Authority and the European Insurance and Occupational Pensions Authority recommended a total overhaul of SFDR, including the replacement of Article 8 and 9 designations. The existing regime has “undermined the intended goal of the disclosures and created confusion for investors,” the groups wrote in a submission to the European Commission.
While it may take years before a revised regulation is unveiled, “the expected removal” of the Article 8 and 9 titles with new categories is already driving change in the EU market, Bioy said.
Meantime, 30 Article 8 and 9 funds have removed ESG-related terms from their names this year, Morningstar reported. The changes are occurring after ESMA released new guidelines in May for labeling funds. The new standards aim to protect investors from misleading marketing and so-called greenwashing.
Fixed income is the sole asset class that posted inflows over the past five quarters for both Article 8 and 9 funds, according to Morningstar. That’s as investors seek steady returns with global interest rates at historically high levels.
Still, equity funds dominated the list of top performers when it comes to second-quarter inflows, led by Mercer’s Passive Global Equity CCF Fund (Ticker MEPGEZ1 ID), which prioritizes investments in companies that demonstrate strong ESG practices. The fund attracted €2.5 billion.
