Industry Updates

Issuers remain cautious on Article 9 ETF reclassifications

Handelsbanken PAB index fund upgrades could spark ETF upgrades

Theo Andrew

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Asset managers remain cautious in reclassifying their ETFs from Article 8 to Article 9 under the Sustainable Finance Disclosure Regulation (SFDR), despite the European Commission’s ruling earlier this year.

According to Morningstar’s latest quarterly report, no ETFs upgraded from ‘light green’ Article 8 to ‘dark green’ Article 9 in Q2 2023, although seven Handlesbanken Paris-Aligned Benchmark (PAB) index funds made the switch.

It comes after billions of euros worth of PAB and Climate Transition Benchmark (CTB) ETFs downgraded to Article 8 around the turn of the year, after issuers deemed them unlikely to be able to meet the 100% sustainable investment requirements outlined under ‘level 2’ of SFDR.

The European Commission clarified the requirements in April, stating products tracking PAB or CTB indices are deemed to make sustainable investments.

It led many to predict we could see a wave of re-upgrades by asset managers that were waiting for clarity on ‘level 2’ of SFDR.

Handelsbanken’s reclassifications could be a sign that more asset managers might be willing to follow suit following the clarification from European regulators.

Hortense Bioy, global director of sustainability research at Morningstar, and the report’s author, said: “This view backtracked from previous guidance given by the EU authorities on this point.

“It remains to be seen if more PAB or CTB funds currently classified as Article 8 will be upgraded. Managers are currently consulting with clients and monitoring market practices and regulatory developments to inform their decisions.”

The European Commission is also expected to publish a broader review of SFDR later this year.

The upgrades by the Swedish bank helped Article 9 funds claw back some market share following the great re-downgrade earlier this year, which fell from 24.1% last September to just 5.1% in December last year.

By the end of June, Article 9 market share had rebounded to 12%.

Investors are favouring the ‘dark green’ products too. Article 8 funds shed €14.6bn in Q2, while Article 9 funds posted inflows of €3.2bn. However, this was its lowest total since the introduction of SFDR in March 2021, according to Morningstar.

Despite this, classified fund assets hit €5trn for the first time as overall assets rose 1.4% over the second quarter, driven by new product launches, products reclassifying from Article 6 to Article 8 and market appreciation.

Speaking to ETF Stream last month, Rumi Mahmood vice president of ESG and climate research at MSCI, said there was a gap in the market in the market for Article 9 ETFs, with only a handful currently available in global and European equities, as well as green bond ETFs.

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