@Pixabay.

Fears over greenwashing continue to dominate the EU funds market in 2025 as the industry gears up for massive regulation changes.

In Q1 of 2025, Article 8 funds netted an estimated €52 billion of net new money, the highest inflows since 2021, supported by increased subscriptions into fixed-income funds.

Since the European Union's Sustainable Finance Disclosure Regulation (SFDR) came into force in March 2021, asset managers must provide more information on the sustainability risks and impact of their investment products sold in the EU.

The effects could be headache-inducing for many investment and fund operations teams as they try to manage the flows as well as keep compliant with the new rules. The EU has been firm on its status around inadvertent non-compliance.

The issue of higher subscriptions could also be a further complication.

In a new report “SFDR Article 8 and Article 9 Funds: Q1 2025 in Review” Morningstar looks at the landscape of Article 8 and Article 9 funds.

The report examined aspects such as flows, assets, product launches and closures, fund name changes, sustainable investment targets, and taxonomy alignment levels.

Redemptions from Article 9 funds persisted for the sixth consecutive quarter as investors pulled a record €7.9 billion, compared with €7.7 billion in the prior quarter.

In comparison, Article 6 funds, which represent a smaller portion (42%) of the EU fund universe, extended their dominance over flows, attracting €112 billion in net subscriptions in the first quarter.

In a separate report released earlier in April, Morningstar said that global sustainable open-end and exchange-traded funds suffered record outflows in Q1 2025, which was largely attributed to geopolitical uncertainty and a growing backlash against ESG investing weighed on sentiment.

According to the paper, investors withdrew an estimated $8.6 billion, highlighting a stark reversal from $18.1 billion in inflows the previous quarter.

“Europe recorded its first quarter of net outflows since we started tracking this universe, with redemptions totalling approximately $1.2 billion, while US investors pulled capital for the tenth consecutive quarter,” it said.

“Combined assets in Article 8 and Article 9 funds edged down slightly

to €6 trillion, representing 58% of the total EU fund market.”

Asia also saw net outflows, though Canada and Australia/New Zealand attracted net new money.

What does the latest report say?

Conversely, in its latest report on the moves in the market, Morningstar said that actively managed Article 8 funds continued their flow recovery by garnering €43 billion.

“At least 262 Article 8 and Article 9 funds rebranded in [Q1], including 185 that

swapped terms and 75 that removed ESG related terms from their names."

“In contrast, inflows into passive Article 8 funds almost halved to €9.6 billion,” it said. “Combined assets in Article 8 and Article 9 funds edged down slightly to €6 trillion, representing 58% of the total EU fund market.”

Newly incepted Article 8 and Article 9 funds, accounted for a reduced share of the total number of funds launched in the EU. The numbers decreased to 47% from 57%.

Fund rebranding activity also accelerated. “At least 262 Article 8 and Article 9 funds with ESG-related terms in their names rebranded in the first quarter, including 185 that swapped terms and 75 that removed ESG related terms from their names altogether, a notable uptick compared with the previous quarter.”

More name and portfolio changes will be reflected in the data in the coming months, beyond the May 21 deadline for the European Securities and Markets Authority (ESMA) greenwashing rule.

The new ESMA rules were introduced as guidelines for investment funds that use ESG or sustainability-related terms in their names.

These guidelines are a direct response to the growing concern about greenwashing in the financial sector, where funds may misleadingly market themselves as sustainable.

The new rules set out clear criteria that funds must meet to ensure their names accurately reflect their investment strategies and commitments to sustainability.

Greenwashing is still seen as a massive risk in the industry. Recently, the Loan Market Association (LMA) said that the greenwashing ‘uncertainties’ still abound for institutional investors

Its latest report specified that green finance administration and compliance burden still hinder efforts to embed practices.

“Greenwashing regulation and initiatives appear to have helped bring some degree of clarity around the scope and breadth of greenwashing,” it said. It added that greenwashing’s complexity was hampering innovation and efforts to mobilise capital towards sustainable business models and activities.

Whether the renaming and outflow trend continues will remain to be seen but nerves around greenwashing are definitely still at play.

 

Please Sign In or Register to leave a Comment.