Morningstar has said 23% of funds labelled Article 8 under the Sustainable Finance Disclosure Regulation (SFDR) do not meet its criteria of an ESG fund.
Following a review of Article 8 funds – those which claim to “promote” sustainable investments – Boya Wang, ESG analyst at Morningstar, told Bloomberg almost a quarter do not live up to the ESG principles they endorse.
“Many Article 8 funds will not be tagged as sustainable funds under our framework,” he said.
Morningstar added the 23% which will be retagged was taken partway through an ongoing migration process to a new ESG fund framework, which it has now completed, meaning the final number could be more.
It comes as regulators across Europe attempt to get to grips with differing interpretations of SFDR and the EU Taxonomy across the asset management industry ahead of the implementation of ‘level 2’ SFDR requirements in January 2023.
Designed to ensure asset managers do not inflate their ESG credentials, SFDR was implemented in March 2021 and requires managers to classify their products as Article 6, Article 8 ‘light green’ or Article 9 ‘dark green’.
In the last quarter, 700 products switched their SFDR status with the majority upgrading from Article 6 to Article 8, according to Morningstar. No funds were downgraded from Article 8 or 9 to Article 6 while just 16 were downgraded from Article 9 to Article 8.
Despite their increasing popularity with asset managers, Article 8 funds have seen significant outflows since February and lost €30.3bn outflows in the second quarter compared to €5.9bn inflows for Article 9 funds, Morningstar said.
It follows the previous cull of ESG funds from Morningstar’s own classification system earlier this year when the index and data provider removed the label from 1,200 funds with over $1trn assets under management.
Despite this, leading ESG data providers including Morningstar have rejected the European Union’s proposals to regulate the sector.
The firm said “principles of good conduct” would be more appropriate than fully fledged regulation.
In May, the European Supervisory Authority (ESA) – a joint committee that includes the European Securities and Market Authority (ESMA) – called into question what funds can be labelled Article 8 or 9 under SFDR.