The application of the Sustainable Finance Disclosure Regulation shows differing views on interpretation

It has been almost a month since the Sustainable Finance Disclosure Regulation (SFDR) came into effect. Since then, management companies have increased communication on the classification of their fund ranges under Article 8 and Article 9 of the European regulation. Axa IM announced 90% of its assets under management under Articles 8 and 9, compared to 96% for CPR AM. Amundi has 656 financial products with €452 billion of assets under Articles 8 and 9, or 60% of its assets.

For the record, the SFDR requires financial products to be classified according to their level of sustainability. Article 8 includes funds that promote social or environmental characteristics, while Article 9 includes funds with a sustainable investment objective. The others are under Article 6, which means they must explain how they consider sustainability criteria.

However, the SFDR text leaves much room for interpretation of these different categories. This led the European regulatory authorities and Eurosif to ask the European Commission to specify the classification criteria. Nevertheless, management companies based in Europe had to get started on their own. Twenty days after the SFDR’s entry into force, Morningstar carried out a study on almost half of the open-ended funds and ETFs domiciled in Luxembourg. It showed that 25% of European assets are classified under one of two articles: 18% under Article 8 and 3.6% under Article 9.

Different approaches

Not surprisingly, Morningstar sees very different approaches from management companies, particularly concerning Article 8. Most consider that ESG criteria must be binding to classify a fund under Article 8, however some management companies consider that the exclusion of certain sectors (tobacco, coal, etc.) is sufficient, with Morningstar citing passive LGIM and BlackRock funds in particular. Others go further by listing funds under Article 8 in which ESG key indicators objectives are imposed on the manager. Under this category, Morningstar referred to funds from Robeco, Amundi, and BNP Paribas.

Under Article 9, listed funds are mainly thematic, such as the iShares Green Bond Index Fund by BlackRock, Baillie Gifford Positive Change, and BNP Paribas Climate Impact. However, Morningstar noted the similarities between funds classified under Article 8 or Article 9, again illustrating the difficulty in interpreting the European regulation.

Fund classification is only the first part of the SFDR. Regulatory technical standards should specify which indicators are meant to inform management companies and require specific work on their part to implement these indicators. The draft regulatory technical standards anticipate 14 indicators on climate and environment, social issues, employment, human rights, and corruption. Management companies must have carried out this work in the coming months based on their strategies, with the first reports on these indicators expected in June 2023.

Arnaud Dumas