Written by 12:00 Member, Member, Sustainable Finance, Sustainable Finance

Study: Sustainable funds barely transparent

The new white paper by FMF member PwC in cooperation with Morningstar shows that the inconsistent data situation makes it difficult to compare sustainable funds and investment decisions.

The desire of investors to invest in sustainable products in the European fund market is unbroken. However, despite the increasing supply, there is still a lack of transparency for the selection decision, as a recent analysis by PwC Germany and the analysis firm Morningstar on the status of ESG disclosure in Asset & Wealth Management 2022 revealed.

"The lack of transparency is largely related to the speed of implementation of multiple regulations."

Only with the entry into force of the Level II requirements of the Sustainable Finance Disclosure Regulation (SFDR) have extended transparency obligations been demanded since January this year.

Labelling runs inconsistently

Level 1 of the EU Disclosure Regulation has been in force since March 2021, according to which products are divided into three categories: Financial products without an explicit focus on sustainability in their investment strategy fall under Article 6; funds falling under Article 8 advertise environmental or social features, among others; investment products classified as Article 9 must explicitly pursue a sustainable investment objective.

According to the whitepaper, asset managers took very different approaches to classifying their funds under Article 8 or 9 of the 2022 Disclosure Regulation.

"It remains to be seen whether there will be a significant increase in product transparency in 2023. Some asset managers interpret the rules more conservatively than others. An Article 8 or 9 classification is not yet a formal ESG label. Investors should ensure they fully understand a fund's individual ESG objectives and investment process."

According to the study, as of the end of December 2022, Article 8 and 9 funds reached a market share of around 55 per cent in terms of assets under management in the European fund market, also due to an increased reclassification of previous Article 6 funds ahead of the SFDR’s Level II requirements. In the second and third quarters, the majority of Article 6 products were upgraded to Article 8.

Investors prefer Article 9 funds

Investor interest in Article 6 and Article 8 funds eased sharply from the start of 2022. Both categories together recorded net outflows of around €80 billion in the third quarter. Funds pursuing an explicit sustainability objective under Article 9 of the EU Disclosure Regulation doubled their inflows to €12.6 billion in the third quarter compared to the previous quarter, despite inflationary pressures, geopolitical risks and market volatility.

In the fourth quarter of 2022, Article 8 funds, which consider environmental and social aspects in the selection of issuers included in the portfolio, again showed net inflows, while Article 9 funds showed the smallest increase since the introduction of the Disclosure Regulation in March 2021. One reason: of the total of 420 reclassifications in the fourth quarter, 307 were downgrades from Article 9 to Article 8, affecting assets under management totalling 175 billion euros.

Stable trend in new fund launches

In terms of new product launches, on the other hand, funds classified under Articles 8 and 9 showed a stable trend over the course of 2022. In addition, asset managers continued to expand their fund range in terms of asset class, market exposure, investment style and theme, with equity funds predominating.

In addition, an increase in ESG and environmental funds can be seen in Article 8 and 9 funds. Under Article 9, several thematic funds expanded their offerings on ecosystem preservation, renewable energy generation or building energy-efficient infrastructure.

Whitepaper ESG Disclosure in Asset & Wealth Management

What are the concrete implications of the ESG disclosure changes for investors, financial distributors and fund issuers?

Source: PwC Germany Press Release as of 6 April 2023

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