Article Nine or Article Nein?

The Third Gloomy Quarter for Article 9 Funds

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.

Source: Adapted for the ITF from Busch et al.

Perhaps most concerning is the misuse of the SFDR itself. Originally introduced as a transparency regulation, the EU Commission has explicitly stated that it was never intended to serve as a labeling regime. However, many financial market practitioners have seized upon the Article 9 classification as a marketing tool, prominently featuring it in promotional materials. This practice not only contradicts the regulation’s intended purpose but also contributes to the growing confusion among investors.

As the sustainable investment landscape continues to evolve, it’s clear that greater clarity and standardization are needed. Investors deserve transparency and concrete evidence of impact when entrusting their capital to Article 9 funds. Only by addressing these challenges head-on can the industry restore confidence and ensure that sustainable investing truly lives up to its promise of creating positive change in the world.

When it comes to impact investing, a common misconception is that doing good for the world means sacrificing financial returns. However, recent findings challenge this notion, revealing a more nuanced picture of the risk-return profile of impact funds. Contrary to popular belief, impact investing actually demonstrates lower exposure to market risk compared to other private market strategies. This intriguing characteristic not only supports the hedging view of ESG but also suggests that impact investing can be a valuable tool for portfolio diversification (Jeffers et al.).

Diving deeper into the numbers, Jeffers et al. find that impact funds are less sensitive to public equity market movements than their traditional counterparts, including venture capital funds. This reduced market sensitivity could be a game-changer for investors looking to shield their portfolios from market volatility. While it’s true that impact funds may show lower total returns compared to benchmark non-impact funds, the gap narrows significantly when market risk exposure is taken into account. For investors who prioritize risk-adjusted returns, this revelation positions impact funds as a compelling option that doesn’t necessarily require sacrificing financial performance for social and environmental benefits. As the investment landscape continues to evolve, these insights invite us to reconsider the role of impact investing in modern portfolio management. 

In the ever-evolving landscape of sustainable finance, impact investing has emerged as a beacon of hope for those seeking to align their financial goals with positive societal change. However, as the sector grows, so do the challenges and skepticism surrounding its effectiveness. Experts are increasingly questioning the ability of impact funds to deliver on their promises, raising concerns about mission drift and “impact washing”.

Recent studies suggest that impact funds need to go beyond simply providing financial capital and focus on adding value through non-financial support. This approach mirrors the strategies of traditional venture capitalists, with impact funds engaging in services related to process optimization, human resources, marketing, communications, and network access (Nachyła et al.).

So, how exactly should impact funds leverage these non-financial strategies? At Impact Labs, we believe that the implementation should occur in three folds.