(Bloomberg) -- Amundi SA and Deutsche Bank AG’s DWS Group are downgrading billions of dollars worth of ESG funds, adding to the sense of disarray that’s spreading across Europe’s asset management industry as it digests stricter regulatory guidance.
Amundi is reclassifying almost all funds listed under the EU’s top ESG category, known as Article 9, a spokesperson for Europe’s largest asset manager told Bloomberg. Instead, the funds will be classified as Article 8, the spokesperson said, referring to the EU’s less stringent environmental, social and governance fund class. The decision reflects “a conservative approach” as Amundi tries to adapt to the EU’s evolving regulatory environment, the person said.
Amundi said the decision affects close to €45 billion ($46 billion) in Article 9 products. A DWS spokesperson said its downgrades will hit about €2 billion in fund assets. Morningstar Inc. said it expects that at least $85 billion in industry-wide Article 9 funds will have been downgraded within the coming weeks and months.
“We expect many, if not all, of what we call ‘climate conscious’ and ‘low carbon’ funds to shift from Article 9 to Article 8,” Hortense Bioy, Morningstar’s global director of sustainability research, told Bloomberg.
Asset managers are purging their portfolios of the once coveted Article 9 designation, amid growing confusion surrounding the EU’s anti-greenwash rulebook, the Sustainable Finance Disclosure Regulation. Intended as a global gold standard for ESG investing, the framework has been tainted by seemingly endless gaps and inconsistencies that have caught out firms including BlackRock Inc., Axa Investment Management, Pacific Investment Management Co. and Goldman Sachs Group Inc.’s NN Investment Partners.
The upshot is that Article 8 is set to grow in assets under management, while Article 9 will be much smaller, Bioy said. That has the potential to anger clients who thought they’d allocated money to Europe’s top ESG category, only to find that’s no longer the case. The development is also embarrassing for the EU, whose efforts to race ahead of the rest of the world with its ESG investing rulebook are showing signs of backfiring.
“Clearly, it means that the Article 9 fund category will shrink, both in terms of number of funds and assets under management,” Bioy said. The designation probably will be limited to “thematic and impact-oriented funds investing in companies that focus on sustainable products and services,” which often tend to be small- or mid-caps, or to “bond funds whose proceeds help finance green and social projects.”
SFDR was enforced in March 2021. But the EU has since clarified key corners of the regulation to require asset managers to reserve the Article 9 designation for funds that are 100% sustainable, save for hedging and liquidity needs. That’s a much higher bar than many had anticipated, and the industry is now in the middle of a protracted correction as fund managers try to digest the change in guidance.
Amundi said its downgrades don’t constitute an acknowledgment that the funds in question are now less sustainable.
The move “in no way calls into question the current level of requirements in terms of the integration of effective ESG criteria and the sustainability characteristics of these funds,” the spokesperson said. “This deliberately cautious approach is in response to Amundi’s concern for protecting investors and distributors from a significant risk of confusion in the allocation of savings.”
Some asset managers had interpreted SFDR rules to mean that using an EU-compliant climate benchmark automatically qualified a fund as an Article 9 product. That’s now far from clear.
“The moving goal posts in the EU have been very tough for the industry,” said Victor van Hoorn, head of European operations at ICI Global.
BlackRock said earlier this month it will downgrade 17 exchange-traded funds classified as Article 9, which will affect $26 billion in assets under management. Many of those ETFs had tracked MSCI climate benchmarks.
MSCI says asset managers are responsible for classifying funds sold in the EU. “We create and calculate indexes to meet the variety of needs of institutional investors,” said Christine Chardonnens, executive director for global ESG and climate Indexes.“Our clients have a range of climate and investment objectives which contribute to their index selection decisions.”
The European Commission has acknowledged that there are differing interpretations and is now looking into addressing the confusion.
“We are aware of the issue,” and “are working in collaboration with ESMA on this,” a spokesperson for the European Commission said in an emailed response to questions.
The European Securities and Markets Authority has said it’s awaiting feedback from the EU Commission on whether using Paris-aligned or climate transition benchmarks qualifies a fund as Article 9.
A third-quarter analysis by Morningstar found that less than 5% of Article 9 funds actually meet the EU’s 100% sustainability requirement.
(Replaces Morningstar estimate with fresh AUM figures from Amundi in third paragraph)
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