The European Commission is considering scrapping its premier sustainable fund class amid mounting frustration among asset managers and growing fears of greenwashing.
Discussions between European Union officials and the asset management industry are ongoing with the commission now debating whether to bin the ‘dark green’ Article 9 funds entirely, the Financial Times reported citing sources.
Currently, funds categorised as Article 9 under the Sustainable Finance Disclosure Regulation (SFDR) are required to invest 100% of their assets sustainably under ‘level 2’ of the regulation which came into force in January.
However, asset managers have repeatedly asked for clarity on what the commission defines as ‘sustainable investing’, with the likes of Amundi suggesting the lack of definition “amplifies the potential greenwashing risk, legal uncertainties and level playing field issues”.
Now, one person in talks with the European Commission told the FT it is considering ditching Article 9 entirely while suggesting “legal constraints” are preventing the body from providing a “satisfactory answer” to the European Securities and Markets Association (ESMA) questions on its definitions.
Scrapping Article 9 would require legal change that can only be enacted by the European Parliament and Council under the initiative of the European Commission and it is possible the EU officials could initiate a review of SFDR.
The European Commission did not immediately respond to a request for comment.
Last month, the French financial regulator the Autorité des Marchés Financiers (AMF) called for a “targeted review” of SFDR due to the lack of minimum sustainable investment requirements or a definition of sustainable investment.
It added the regulation is currently being “misinterpreted” by investors as a “guarantee” they are participating in the financing of a more sustainable economy.
The lack of clarity has already had a profound impact on the ETF landscape, with roughly $57bn of assets across more than 70 ETFs being reclassified from Article 9 to Article 8 in Q4 2022 alone, according to Bloomberg Intelligence.
In a bid to help the process, ESMA published a consultation paper on naming ESG-related funds last November, citing a need to protect investors, stamp out greenwashing and “address any misuse” SFDR.
However, many asset managers questioned the timing of the rules with the definition of sustainable investing still up in the air.
Last week, the Financial Conduct Authority (FCA) said it would be delaying the implementation of its Sustainable Disclosure Regulation (SDR) and easing the rules around which funds can be labelled sustainable.