DWS has joined rivals in downgrading 10 Paris-Aligned Benchmark (PAB) climate ETFs from Article 9 to Article 8 ahead of the incoming ‘level 2’ of the Sustainable Finance Disclosure Regulation (SFDR) in January 2023.

Effective 16 December, DWS said its decision followed European Supervisory Authorities queries to the European Commission regarding how to interpret definitions of what constitutes a sustainable investment.

In September, a joint consultation asked “whether financial products with a passive investment strategy which designate as a reference benchmark a PAB can automatically be deemed to fulfil the conditions of Article 9(3) SFDR in conjunction with Article 2(17) of the SFDR”.

The European Commission has yet to clarify whether PAB climate investments automatically meet the Article 9 requirement to “only make sustainable investments” and as such, DWS has taken the precautionary measure of voluntarily downgrading its PAB ETFs to Article 8 ahead of more granular definitions of sustainability being provided in the next phase of SFDR.

The 10 ETFs being downgraded are: 

  • Xtrackers USD Corporate Bond Short Duration SRI PAB UCITS ETF (XYLD) 
  • Xtrackers USD Corporate Bond SRI PAB UCITS ETF (XZBD)
  • Xtrackers EUR Corporate Bond SRI PAB UCITS ETF (XB4D) 
  • Xtrackers EUR Corporate Bond Short Duration SRI PAB UCITS ETF (XZE5)
  • Xtrackers World Net Zero Pathway Paris Aligned UCITS ETF (XNZW)
  • Xtrackers EMU Net Zero Pathway Paris Aligned UCITS ETF (XNZE)
  • Xtrackers Emerging Markets Net Zero Pathway Paris Aligned UCITS ETF (XEMN)
  • Xtrackers Europe Net Zero Pathway Paris Aligned UCITS ETF (XEPA)
  • Xtrackers USA Net Zero Pathway Paris Aligned UCITS ETF (XNZU)
  • Xtrackers Japan Net Zero Pathway Paris Aligned UCITS ETF (XNJG)

In a statement, DWS said: “As of today, DWS and the board of directors of the fund platform consider that some Xtrackers UCITS ETFs such as those with a reference index aiming to track green bond universes can continue to report under SFDR Article 9.

“Generally, DWS will continue to monitor discussions at regulator and industry level to see whether any further changes are necessary.”

DWS becomes the latest ETF issuer to downgrade a raft of ETFs from Article 9 to Article 8, a process which started with BlackRock and UBS Asset Management reclassifying PAB and Climate Transition Benchmark (CTB) strategies housing a combined €21bn assets, ETF Stream revealed.

This was soon followed by Amundi reclassifying €19bn of PAB and CTB ETFs last week and BNP Paribas Asset Management downgrading its €15bn range on Thursday.

Invesco, HSBC AM and Deka also previously downgraded their PAB and CTB ETF ranges.

As it stands, less than 5% of Article 9 funds achieve at least 90% exposure to what can be deemed sustainable investment exposure, according to data from Morningstar.

Once the regulator provides clarity on what constitutes a sustainable investment in H1 next year, asset managers may have the opportunity to reclassify their funds back to Article 9 where appropriate.