Regulation sparks wave of reclassification of green funds in the EU -Morningstar

FILE PHOTO: European Union flags in front of the European Commission headquarters in Brussels, Belgium, August 21, 2020. REUTERS/Yves Herman

LONDON, Jan 26 (Reuters) – According to Morningstar data, in the fourth quarter asset managers downgraded funds with 175 billion euros ($190.7 billion) of assets in the fourth quarter that were at the highest level of asset ratings. sustainability of the European Union, accelerating a recent trend towards stricter regulations.

The EU’s Sustainable Finance Disclosure Regulation (SFDR), aimed at tackling misleading claims by managers about their sustainability efforts, is being rolled out gradually and since January requires more information details to support them.

Previously, the European Supervisory Authorities (ESAs) had tried to clarify how to apply some elements of the Regulation. However, many managers said that questions remained, especially around what was considered a “sustainable investment”.

As a result, many chose to reclassify their funds as “article 8”, which carries less onerous reporting requirements, from the highest level, article 9.

In total, 419 products have seen their status change in the fourth quarter, of which 307 moved from Item 9 to Item 8, about 40% from the “dark green” category, according to Morningstar.

“Almost two years after the SFDR went into effect, the landscape for funds marketed as green in the EU is undergoing some radical changes,” said Hortense Bioy, Morningstar’s global head of sustainability research.

“We expect the recent spate of downgrades of Article 9 funds to continue, raising questions about what will remain and the usefulness of that category.”

Europe’s biggest fund manager, Amundi, said in November it would reclassify “almost all” of its Article 9 funds.

Currently, only 3.3% of the funds’ assets are traded in the higher sustainability category, while 52.2% are in article 8.

After the downgrades, according to Morningstar almost two-thirds of Article 9 funds expect to have more than 70% exposure to sustainable investments, but only 6.3% between 90% and 100%.

The European Securities and Markets Authority recently clarified that Article 9 funds should only have sustainable investments, according to Morningstar.

UPWARD IN CASH FLOWS

A difficult year for fund companies has ended on a more positive note.

Global sustainable funds attracted a net $37 billion of new money in the fourth quarter, helping end three straight quarters of asset declines, Morningstar said in a separate report Thursday.

By contrast, the broader market saw net outflows of $200 billion as rising interest rates and economic concerns weakened investor confidence.

Net inflows into sustainable funds were in Europe, Australia and Canada. In other places, such as the United States, where there has been a political backlash against sustainable investing in some Republican-ruled states, investors withdrew cash.

Assets in sustainable funds reached $2.5 trillion at the end of 2022, up from $3 trillion at the end of 2021, according to Morningstar. Europe represents 83% of assets.

(Reporting by Virginia Furness and Tommy Reggiori Wilkes; Editing in Spanish by Flora Gómez)

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