Article Nine or Article Nein?
The Third Gloomy Quarter for Article 9 Funds
The Sustainable Finance Disclosure Regulation (SFDR), introduced by the European Union in March 2021, represents a significant milestone in sustainable finance regulation. The framework categorizes investment funds into three distinct classifications: Article 6 (no sustainability integration), Article 8 (promoting environmental or social characteristics), Article 9 (having sustainable investment as its objective).
Initially heralded as a game-changing transparency tool, SFDR aimed to combat greenwashing and provide clarity to investors.
The regulation’s evolution has been marked by several key phases. In its early implementation, many asset managers rushed to classify their funds as Article 9, seeing it as a prestigious label. However, by late 2022, regulatory scrutiny intensified, leading to a wave of downgrades from Article 9 to Article 8 status. This “downgrade wave” highlighted the challenges in meeting the stringent requirements of Article 9 classification, which demands that all investments, except those for specific purposes like hedging, must have sustainable objectives.
The regulatory landscape continued to evolve with the introduction of additional technical standards in January 2023, requiring more detailed disclosures about environmental and social impacts. These changes have forced asset managers to be more precise and cautious in their fund classifications, leading to a more mature but arguably more conservative approach to sustainable investment labeling.
Despite growing awareness of climate risks and ESG concerns, these supposedly elite sustainable investment vehicles are facing significant outflows. This situation has left many industry observers scratching their heads. Article 9 funds have just experienced their third consecutive quarter of withdrawals, with a record-breaking outflow of €6.2 billion in Q2 2024. The only one asset class within Article 9 managed to stay afloat was fixed income, pulling in €4.22 billion in 2024 (Morningstar).
What’s behind this shift in investment interest? What does it mean for the future of sustainable investing? What are some possible ways to boost the confidence of sustainable investors?
This article attempts to shed some light onto the currently gloomy scene of sustainable investing.
Does Sustainable Investment Objective Equal Impact?
One of the primary issues plaguing Article 9 funds is the disconnect between their stated objectives and demonstrable impact. While a staggering 72% of these funds claim to have impact-generating objectives in their product documents, only a mere 20% can actually demonstrate how their investment strategies contribute to tangible environmental or social outcomes (Scheitza et al.). This disparity has led to growing skepticism among investors and calls for greater accountability in the sustainable investment sector.
Adding to the confusion is the interchangeable use of terms like “impact investing” and “Article 9 Funds”. Industry experts warn that this conflation is not only inaccurate but potentially misleading. The reality is that funds classified under Article 9 encompass a broad spectrum of investments, including both impact-related and ESG-related strategies. This ambiguity is largely due to the discretion allowed by the SFDR in defining and implementing sustainable investment objectives.
Sustainable investments
Impact investments
Objective
ESG-screened investments
ESG-managed investments
Impact-aligned investments
Impact-generating investments
Mitigation of ESG-related risks and/or ethical considerations
Systematic consideration of ESG-related risks & opportunities
Address social and environmental challenges and goals
Actively contributing to social and environmental solutions
General approach (benefitting from harmonization)
Any consideration of E, S, or G factors in investment appraisals; typically focusing on exclusion criteria
Comprehensive set of exclusion criteria; at least one further pre-investment decision approach is applied
Building on exclusion criteria, sophisticated combination of pre- and post-investment decision approaches
Focus on impact generation by providing additional capital, incorporating forward-looking targets and/or post-investment decision approaches
Documentation (efforts to increase transparency)
No detailed documentation
Basic description & ideally external verification
Detailed description & external verification of iimpact goals
Detailed description & external measurement of impact goals & targets
Source: Adapted for the ITF from Busch et al.
Sustainable investments
ESG-screened investments
Objective
Mitigation of ESG-related risks and/or ethical considerations
General approach (benefitting from harmonization)
Any consideration of E, S, or G factors in investment appraisals; typically focusing on exclusion criteria
Documentation (efforts to increase transparency)
No detailed documentation
ESG-managed investments
Objective