But the pool of Article 9 products is shrinking fast. Asset managers removed the tag from 40% of the market in the fourth quarter alone after stricter regulatory guidance. Julia Vergauwen, an attorney at Linklaters who advises the fund industry, said several of her clients don’t want to touch Article 9 funds due to new and shifting ESG rules. And analysts such as Luke Sussams at Jefferies warn that 2023 is turning into a lost year for Article 9 issuance.
Managers are steering clear because of “the risk of greenwashing accusations, because of the level of scrutiny on Article 9,” he said. At the same time, clients can’t get enough.
“Our numbers show that capital flows to Article 9 products in Europe were positive every single month of 2022,” Mr. Sussams said. “That is a staggering statistic.” So “those who manage to stay the course and keep Article 9 products on the market in Europe look set to benefit.”
That’s likely to be an ever smaller group as continual waves of updates and corrections to existing ESG regulations prompt many in the industry to freeze issuance plans. The few still producing Article 9 funds are sticking with specific asset classes such as green bonds, or carbon offsets. The latest figures from Morningstar show the Article 9 market has about €330 billion ($360 billion) of client assets.
“We have some fund managers in the market who do want to go for more Article 9 funds, but there is too much regulatory uncertainty and so they are waiting,” Ms. Vergauwen said. “They’re waiting to see what the regulators come up with.”
Firms holding back on Article 9 designations include the asset management arm of BNP Paribas SA. Its Environmental Absolute Return Thematic (EARTH) fund, which has outperformed 95% of peers this year, is long renewable energy and short fossil fuels. But because EU regulators haven’t clarified how fund managers should treat derivatives in their disclosures, BNP has registered the fund under the bloc’s weaker ESG category, known as Article 8, and says it won’t revisit the decision until EU rules are clearer.
The EU has acknowledged there are problems and Mairead McGuinness, the bloc’s financial markets and services commissioner, has said she plans to launch a consultation into the matter. Some, such as the French financial regulator, warn there’s not time to wait for a consultation to run its course. Instead, the EU should to go back to the original legislation and quickly fix the Sustainable Finance Disclosure Regulation’s problems at the source, the French say.
Regulators have tried to address the confusion by providing clarifications when they can, but are calling for a more fundamental review of SFDR. A spokesperson for the European Securities and Markets Authority told Bloomberg that ESMA “also supports” reforming SFDR via the original legislation. “We have publicly called for labels for sustainable financial products to combat greenwashing and to protect investors,” the person said.