Broad ESG funds lose out to ‘greener’ vehicles in Europe
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Investors in Europe are deserting funds that align with broad environmental, social and governance principles, but vehicles that target specific “sustainable” investment goals are seeing positive inflows, data show.
In the nine months to the end of September mutual and exchange funds classified as Article 9 products under the EU’s Sustainable Finance Disclosure Regulation had net inflows of €32.8bn, while Article 8 products had outflows of €173bn, research from Refinitiv Lipper shows.
Article 8 funds, sometimes dubbed “light green”, have to show they generally promote environmental or social characteristics. In contrast, Article 9 funds target a sustainable outcome as a specific objective.
“The current discussion around ‘greenwashing’ and the missing clear standards for the categorisation of funds by the respective SFDR article might be reasons why the European fund industry witnessed outflows from Article 8 products since these products are somewhat in-between products as they support ESG criteria but do not have a formalised ESG-driven investment approach,” the Refinitiv Lipper report said.
“Run away from greenwashing — that would be the main theme there,” said Detlef Glow, head of Lipper Emea research at Refinitiv, although he added that €93.1bn, more than half the Article 8 outflows, had come from ESG-related money market funds rather than equity vehicles.
The ongoing demand for impact-oriented sustainable investment is all the more remarkable, though, when compared to the overall outflows of €333bn recorded by Refinitiv Lipper from the European fund industry at large in the first nine months of the year.
The above chart illustrating the trends includes flows to funds domiciled in the UK and Switzerland, which fall outside the EU and therefore include funds unclassified under the SFDR.
Of those that fall within the SFDR classification system, the data reveal some of the difficulties facing fund managers and investors, analysts say.
“Given how inconsistently and unsystematically . . . ESG values are determined and applied, it strongly suggests to me that there is huge potential for much better products that do the job better,” said Patrick Wood Uribe, chief executive of Util, a specialist ESG data provider.
Hari Bhambra, global head of compliance at Apex Group, a financial services provider, said the uncertainty created in relation to accusations of mislabelling was putting investors off.
“With increasing focus on greenwashing and concerns around the level of disclosures, investors may, currently, prefer to invest in a more definable investment objective or strategy.”
Fund managers also do not want to get caught out, as evidenced by the growing number of fund downgrades. Research from Morningstar showed that 41 funds downgraded to Article 8 from Article 9 in the third quarter of this year, adding that more were expected to follow suit in the coming months.
“At the moment, it remains very vague how the EU taxonomy principles may be applied to investments. Investee companies often struggle with unclear eligible activity breakdowns and the data coverage remains low, especially for smaller firms that don’t have the expertise or capacity for related disclosures,” said Kamil Sudiyarov, product manager with fund manager VanEck.
He said VanEck had consequently decided not to take up the option of indicating the degree of EU taxonomy alignment achieved by its environmentally sustainable Article 9 funds — “even those that were designed with the goals of the EU taxonomy in mind”.