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Amundi, France’s largest asset manager with over a trillion dollars in AUM under its belt, is the latest asset manager to join a recent downgrading trend for ESG funds moving from Article 9, which are products that specifically target sustainable investments, to Article 8 - products that promote sustainable investments - in the EU’s Sustainable Finance Disclosure Regulation (SFDR) framework.

This change is key as Article 9 represents funds that are stricter and more structured in their level of ESG compliance, whereas Article 8 is often seen as a melting pot with vaguer implications and definitions.

The move echoes similar changes made in the industry recently, which could cause a compliance headache and administrative burden for chief operating officers if it becomes a ubiquitous trend.

The company joins other asset managers such as BlackRock, HSBC, AXA, Invesco, NN Investment Partners, Pimco, Neuberger Berman, Robeco, and Deka, which have all recently changed the labelling of their ESG compliant funds from Article 9 to Article 8. These organisations are taking a more conservative approach due to a so-called increasingly strict regulatory environment.

Downgrading  trend is quickening

This trend has become more pronounced throughout November as more and more prominent companies join the bandwagon. The asset managers all claim that the EU’s flagship Article 6, 8, and 9 framework for ranking and classifying ESG funds is too stringent when it comes to compliance – and overall outpaces the speed of development in the fund management arena.

"The current regulatory framework does not yet allow the financial industry to respond in a uniform manner as to what should be considered 'sustainable' or not," Amundi said in their statement to Fund Operator.

Amundi said they made this change due to a “still evolving regulatory environment” — and as part of a “conservative approach”.

In their comments, Amundi said they made this change due to a “still evolving regulatory environment” — and as part of a “conservative approach in terms of levels of sustainable investment published in regulatory documentation.” This choice has led to the reclassification of almost all of its range of Article 9 funds into Article 8, the release continued. "At end September 2022, Amundi managed approximately 100 SFDR Article 9 open funds for around €45 billion, roughly evenly split between ETFs and active management."

The move comes after additions to the Article 9 definition this summer that state that included funds need to prioritise sustainability impacts as well as having issuers that are already considered sustainable. Transition investments are no longer allowed in this category — an issue for many organisations who were using transition investments to bolster their SFDR categorisation. 

Amidst this changing landscape, many companies have chosen to err on the side of caution — or conservatism, as they said. The downgrades come as the environmental, social and governance sector faces growing criticism and accusations of greenwashing, which have prompted investigations by regulators and law enforcement in the US and Germany. 

"[The] deliberately cautious approach is in response to Amundi's concern for protecting investors and distributors from a significant risk of confusion in the allocation of savings."

According to Amundi, the "deliberately cautious approach is in response to [their] concern for protecting investors and distributors from a significant risk of confusion in the allocation of savings."

Article 9 definition narrows

Under SFDR definitions, Article 9 funds are those that specifically target sustainable investments. A new set of regulatory standards will also be in effect, beginning in early 2023. These standards were launched by the EU Commission this past summer to give European fund managers more clarity on meeting ESG targets and staying compliant.

This new Article 9 framework mandates fund managers to disclose information about their sustainability approach, risks, and impact – a change many in the industry have anticipated as more stringent and which, resultantly, has been met with widespread downgrading to Article 8.

Differentiating between the two articles has remained complicated – and at times controversial – due to greenwashing fears and guidelines that are still developing.

The Article 8 categorisation is less strict, with its core aim a transitional one: facilitating products that promote sustainable strategies rather than wholly comply with them. Differentiating between the two articles has remained complicated – and at times controversial – due to greenwashing fears and guidelines that are still developing, and firming up as they do so.

A recent Q3 2022 update from Morningstar found that Article 8 funds “bled €28.7 billion in the third quarter”, transferring this AUM to the Article 6 categorisation – one which signifies a fund has no ESG characteristics whatsoever.

Seeking a positive spin

According to Morningstar data, the more positive picture for Article 9 funds is that their organic growth rates “have been the highest since the introduction of SFDR, and have remained positive this year.”

Organic growth rates for Article 8 and Article 6 funds, on the other hand, “sunk deeper into negative territory,” the report said.

“New reporting systems will have to be put in place. The majority of investors don’t believe fund managers’ claims of being ESG-compliant."

When Fund Operator spoke to Roger van Poortvliet, Global Head of Finance at Impax Asset Management, in November, he said that the growing number of stricter ESG requirements means more work for sustainability teams. There will be an intensive period of effort required to understand and adapt to changes, he added. “New reporting systems will have to be put in place. Decisions on what and how to disclose will have to be made.”

The downgrading trend is evidence that asset managers and fund operators are heeding this advice – and taking time to do so, for better or worse. In van Poortvliet’s view, brevity and clarity when it comes to reporting are most important, especially when it comes to preventing greenwashing. “The majority of investors don’t believe fund managers’ claims of being ESG-compliant,” he said. “Clear disclosure will help redress the balance.”

While fund managers work to clarify their compliance levels, it remains to be seen if the additional time it takes to do so will have negative ramifications elsewhere.

 

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